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Equity Risk and the Presidential Election: What Does History Tell Us?

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Some people are never happy.

Increased market volatility as part of the “new normal” is the subject of countless debates, an immeasurable amount of news stories and largely the reason for the rise in popularity of alternative investments. But concern doesn’t dissipate when markets calm, as the relative stability experienced in recent weeks is simply dismissed as the calm before the storm, egged on by the possibility of reaching the fiscal cliff and other concerning economic data.

But is something else at play which might explain the eerie market silence?

Yes, says a new research paper from risk management firm Axioma; a little thing called a presidential election.

Historical data suggests there is a relationship between U.S. presidential elections and equity volatility, the company finds, with volatility typically decreasing from June to November. Axioma looked at market behavior during election and non-election years going back to 1986. They found that stocks experience periods of calm between August and October of a presidential year.

This year, volatility has decreased in every month to date, except for July and August, which recorded modest increases.

Markets, on average, also remain calm following an election (excluding 2008, of course).

“If we manage to avoid a strong market downturn in October…the ‘typical’ presidential election outcome would be a steady volatility decrease for the rest of the year,” Axioma’s Anthony Renshaw wrote in the note, as reported by The Wall Street Journal’s Total Return blog. “This would certainly be welcome news, especially with all the troubling economic indicators…out there.”


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