US Presidential Elections – Historical Impact to Equity Markets

Introduction

In reviewing the historical calendar year performance of US presidential election years – one could be optimistic about the remainder of 2024. For the first 5½ months of this year, equity markets (S&P 500 Index) have generated strong returns. In fact, 2024 is the strongest market performance during such a period in any election year since 1960.

In addition, regressions of post June-15 returns on pre-June 15 returns show much stronger positive relationships during election years vs non-election years, as demonstrated in the chart below:

Statistically, regression coefficient[1] of Post-June 15 returns on Pre-June 15 returns was 0.36 in the election years compared with just 0.05 in non-election years. Furthermore, in all election years since 1960, if S&P500 was up more than 5% through June 15^th, it had a positive rest of the year.

Considering only the years with a similar profile to the 2024 return profile through June 15, could make one even more bullish. The table below shows pre- and post-June 15 performance for the most similar years to 2024. S&P500 saw solid returns during the second half of these years:

Finally, we review the daily performance of the time periods noted in the table above. Evidenced by the return patterns in the graph below, there was no obvious way to time entry and exit during these years.  The graph below shows performance during 130 days before election days as well as 40 days after that. A buy and hold strategy appears to have been the best strategy historically.

[1] The regression coefficients are a statically measure which is used to measure the average functional relationship between variables. In regression analysis, one variable is dependent and other is independent. Also, it measures the degree of dependence of one variable on the other(s).

What are the option markets telling us?

Very low risk is currently priced in the options market relative to history. The chart below shows that implied volatility curves for SPX December 2024 and SPX March 2025 options are the lowest among the election years in this century:

This low level of implied volatility historically has resulted in a low implied probability of market sell-offs (S&P 500). The table below illustrates implied probability of sell-offs priced in the next December contract as of June for the given year – highlighting that the currently implied probabilities of sell-off are very low compared with election years since 2000:

Tail scenarios remain

Tail outcomes resulting from election results should, by definition, happen very infrequently. Even if we assume that tail outcomes happen 5% of the time, i.e. once every 20 elections, the fact that we did not see a bad outcome in the last 17 elections, does not provide enough statistical evidence that it is safe to bet on a positive election outcome in 2024.

The US electorate is on edge more in 2024 than it has been in a while, and we do not need to restate the turmoil in the US political system. Furthermore, recent experience outside of the US has demonstrated that elections do produce volatility: France, India, Mexico and South Africa have all provided surprises to both the political establishment and investors.

What to do?

If the expected outcomes from the current levels are somewhat binary – either a continuation of an equity rally as was the case during the similar years or a tail outcome – investors may want to consider hedging their equity portfolios at these historically attractive levels. Investors may choose to hedge their portfolios using the historically cheap equity put options or to sell out-of-the-money Calls to achieve a zero-premium structure. The table below shows prices of different protective structures (as of June 17, 2024).