Election Incoming! What Kind of Market Volatility You Should Expect?
Market volatility can improve or destroy our purchasing power. It happens so often that the term is quite familiar now.
We call it market volatility when describing unexpected or quick changes in product or asset prices. At Finance team, we try to take on significant issues that destabilize fiscal status.
If market volatility increases, people will have a rugged time buying essentials. That may lead to internal conflicts, rationing, famine, and even civil wars.
You may wonder what leads to market volatility so often. Of course, global trade terms dictate it to some extent. But corporate events like the rise and fall of companies matter, too. However, international and regional politics matter the most. Most importantly, elections.
Elections Impacting Market Volatility
You will see intense market volatility at the time of elections in most developed and developing countries. Here, we will not focus much on product price volatility.
We know that fund flow is reduced during elections. There are other restrictions on the supply chain, too. So, product prices may fluctuate. However, stock prices have dropped below expectations during the last few elections. We need to know why asset prices fall (rarely rise) during the elections.
Historical Context
We must see what happened decades ago. Let’s talk about 2008 and 2016 especially. Both times, we saw the market-crushing during the elections.
Meanwhile, we witnessed the most significant economic crisis and stock price fall during 2008. That also gave way to the Great Financial Crisis of 2008-09.
But then Barrack Obama assumed the hot seat, and people expected prime changes. But things went hayway. Firstly, we did not observe any discrete or different financial policies. Meanwhile, experts observe that most policies were short-lived.
Way to 2016…..
As the elections approached, people started dreading the market changes again. So, much emotional trading was involved in the market’s volatility then. But the fact is that the same happened again.
Different polls predicted different outcomes. People got confused. They could not fathom which leader would assume the throne or what policy they would follow.
The most significant sectors did not want to introduce new shares. Meanwhile, index funds also took in record hits at that time. So, it was only expected that people would go crazy to sell shares at the slightest hint of a price fall.
When that happened, there was no turning back. The range of US-based IT companies suffered as They had the greatest share prices recently.
Election vs. Non-Election Years
We can’t deny that political affairs control market behavior. There are fewer abrupt price falls, or market crashes when elections are not around. So, we compared stock price changes during the election vs the non-election years.
We found that inflation, business results, or rise in new sectors determine the rise or fall of stock prices. However, you can generally project those trends through fundamental analysis. However, experts can’t predict the emotional behavior in the stock market.
It depends significantly on the political campaigns and their influence on the public. The same occurred at the time of the elections of 2016. The looming cloud of uncertainty was visible once again. Both candidates had a fair chance of winning.
The market and investors were equally baffled. Consequently, people started pulling off investments.
Warren Buffet said he could not see any ray of light through the clouds of elections. Check this content to learn about the difference in stock performance during elections vs non-election times.
Factors Contributing to Market Volatility During Elections
Several factors contribute to the heightened volatility experienced during election years. One of the most significant is political uncertainty. As candidates campaign and present their platforms, the potential for policy changes looms large.
Investors often react to news and debates. It leads to rapid buying and selling of stocks based on perceived outcomes. The different realizations fuel this reaction. Usually, people see that other candidates can implement vastly different policies, each with different economic implications.
Another critical factor is the anticipated changes in economic policies. Such changes happen whenever the administration changes. When elections are on the horizon, investors become increasingly focused on the candidates’ proposed policies. They are eager about:
- Taxation,
- Regulation,
- Trade relaxations and
- Trade notions.
For instance, you may think a candidate is pro-business. In that case, the stock market may experience several favorable policies. Another candidate can advocate stricter regulations. Consequently, investors may become cautious. It will also lead to sell-offs in specific sectors.
Investor behavior and sentiment also play a pivotal role in driving market volatility during elections. Most importantly, there is equal fear and optimism. And that clouds judgment. People also make poor trading decisions. As election day approaches, the media coverage intensifies. At the same time, the emotional stakes in trading rise.
Investors often react not just to the candidates’ policies. They also respond to the prevailing narratives spun by news outlets and analysts. This interplay between psychology and market dynamics can result in dramatic fluctuations. Stocks may become susceptible to news cycles. There can also be shifts in public perception.
Sector-Specific Impacts
Election years can impact various sectors of the economy differently. As such, there will be a complex tapestry of market reactions. The financial industry, for instance, is susceptible to political changes.
Banks, investment firms, and insurance companies are often directly influenced by candidates’ positions on regulation and financial reform. A candidate promising to ease rules may lead to stock price increases for financial institutions. On the other hand, stricter regulations could have the opposite effect.
Similarly, the healthcare sector experiences notable shifts during election years, particularly in the context of proposed healthcare policies. Candidates’ platforms on healthcare reform can lead to significant volatility in stocks. The stocks related to pharmaceutical companies, insurers, and healthcare providers would especially be hit. For instance, some emerging local stocks will weaken if a candidate advocates for universal healthcare.
What does the future hold?
We hope the tech sector will stay strong despite turbulences during the elections. But there are a lot of underlinings that may make us think other ways. Firstly, many privacy concerns exist, such as data leaks during elections. Meanwhile, the taxation and trade regulations may change to accommodate the interests of the political parties.
In that case, the investors won’t feel inclined towards the market. I think history will repeat itself. People will start selling their shares profusely at the hint of any policy change.
Predictions for Future Elections
in the upcoming elections, there can be more factors at play. I presume that there will be very high inflation overnight. The throne dilemma over Donald Trump will be pivotal here. Meanwhile, the growing unemployment rate is already keeping people on their tiptoes.
Investors are ready to earn low and slow. But they won’t commit to any risky period. So, most investors will take money away from the market immediately before the elections.
The ongoing discourse around critical issues, including climate change, healthcare, and social justice, will undoubtedly influence voter sentiment and candidate platforms.
Investors can find out some trends that we saw during the last elections. After that, we should check the predictions for current and upcoming elections.
Meanwhile, we are observing polarization in the US. If that continues, the market will be bifurcated. And the hit will be more massive.
However, investors would benefit from staying attuned to developments and analyzing how specific candidates’ proposals may impact their portfolios. Being proactive and informed can help investors navigate the uncertainties of election years effectively.
Conclusion
In summary, the impact of election years on stock performance is profound and multifaceted. Historical trends, political uncertainty, changes in economic policies, and sector-specific reactions all contribute to high market volatility.
Investors may navigate the complexities of financial markets. But understanding the interplay between politics and economics won’t be so easy. Each time, some unpredictable factors were impacting stock markets.
To play safe, we must closely follow campaigning trends, investments around elections, and exit polls.
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