Charting the Market: Presidential Politics and Portfolios

The market is implying noticeably higher levels of volatility during the March primaries and the November presidential election.

Sentiment towards health care is negative, but the sector could surprise to the upside.

Matthew J. Bartolini, CFA
Head of SPDR Americas Research, State Street Global Advisors

Whether it is caucus recounts, impeachment hearings, or torn up State of the Union speeches, there’s no way to escape political headlines this year. As a result, sentiment could briefly shift based on the next salvo of political schadenfreude. We are, after all, in a new volatility regime where geopolitics are fueling micro-bursts of volatility that upended rallies for a short period of time before calmer heads prevail—or monetary policymakers step in and offer support.

Because the so-called safety nets have a few holes, this regime is expected to continue. In terms of fundamentals, earnings growth is slow to negative, and valuations are expensive in the US market. On the macro front, economic growth is slow, inflation is tepid and deficits are large. In the end, however, political headlines are more noise than anything else. Campaign promises make for good evening news fodder, but without real legislative changes, the effects on growth and inflation are minimal.

At the same time, words can be hurtful: We have seen time and again that grandiose comments can induce volatility that drags on returns. The concept of volatility drag in a whipsaw market like our current one should be a portfolio construction concern, as supported by simple math: If you lose 10%, you then need to make 11% to break even. In this climate, it’s important to focus on downside risk mitigation.

Here, we examine three political trends that investors should be aware of as we head further into 2020.

Gearing up for Super Tuesday and beyond
By the end of March, 70% of the Democratic Party presidential primary contests will be finished, inspiring either clarity or further uncertainty for the crowded field. Perhaps the Iowa caucus results will be tallied by then, too. Much of the action will take place on March 3rd when 15 states head to the polls during Super Tuesday.

Given the large number of candidates and ambiguity around the eventual victor, the market is implying noticeably higher levels of volatility during the March primaries and also near the presidential election in November, as shown below by the CBOE VIX futures curve. After the election, the implied level of volatility declines.

please insert chart here

Source: Bloomberg Finance L.P., as of January 17, 2020.

A few points of clarification: First, the curve is naturally upward sloping, as uncertainty increases the further you extend the time horizon. Second, to simplify our analysis, we ran the VIX futures curve prior to the coronavirus outbreak on January 17, 2020; the curve inverted after news of the virus due to the sizeable risk-off move. Nonetheless, the curve illustrates how the market is pricing in political trepidation.

Key takeaway: Watch out for headlines in March that could potentially impact sentiment—but otherwise, wait until the political results have clear policy implications.

Are elections risky?
According to historical data, the October to December timeframe tends to be a period of higher volatility than any other three-month span, largely because of systemic market crashes that have occurred in October (e.g., the crashes of 1929 and 1987, and Lehman’s bankruptcy in 2008). More recently, however, there have been smaller-scale drawdowns, such as the sell-off of October 2018, when the S&P 500® Index declined nearly 10% on the month and fell another 10% through Christmas.

There are no real reasons why the fall season brings more market “falls.” Some point to an omnipotent “October effect” but that theory has largely been debunked as a statistical quirk exaggerated by outliers, leaving it to have a mainly psychological effect.

Analysis of the October to December timeframe becomes more interesting when we account for US presidential elections. Through this lens, we see that volatility is higher in presidential election years during those already high-volatility months. As shown below, the average level of the CBOE VIX Index—known as the market’s fear gauge—is higher than in non-presidential election years.

please insert chart here

Source: Bloomberg Finance L.P., as of January 31, 2020. Calculations per SPDR Americas Research. 

While the typical volatility profile is hard to reconcile because it is not really supported by a fundamental or behavioral bias, the election volatility impact is easier to understand. Election outcomes can impact policy. When the executive and the legislative branches are both up for grabs, the result could be more gridlock or a distinct change in policy based on party lines.

Key Takeaway: It’s only February and our environment is already politically charged—so don’t be surprised this autumn if leaves aren’t the only things falling.

Polling results and health care returns
Political polling numbers have already impacted market returns in health care. Many Democratic presidential candidates are campaigning on large-scale health care reforms at a time when drug pricing, insurance plan coverage and the opioid epidemic are at the forefront of legislative discussions. That said, even if a Democratic candidate who campaigned for “Medicare for All” wins the election, the chances of passing the legislation in the near term are unlikely as long as the Senate is controlled by Republicans.

Despite the likelihood of legislative gridlock, markets are reacting. Massachusetts Senator Elizabeth Warren and Vermont Senator Bernie Sanders are the more progressive candidates regarding health care reform. As shown below, the return on health care stocks has suffered as their polling figures have improved.

please insert chart here

Source: FactSet, Real Clear Politics, as of January 31, 2020. Past performance is not a guarantee of future results.

The current negativity towards health care sets the stage for the sector to potentially surprise to the upside, thanks to its fundamental backdrop combined with secular tailwinds. Health care firms are expected to post the strongest earnings and revenue growth in 2019 of any sector, and over the past three months, analysts have been ratcheting up their 2020 earnings-per-share (EPS) estimates for the sector. This has led to the second-largest increase in 2020 earnings by a sector, behind technology. Additionally, as shown below, health care stocks are trading below their 15-year average, based on various valuation metrics—a claim the broader market can’t make. 1

please insert chart here

Source: FactSet, as of January 31, 2020. Past performance is not a guarantee of future results. P/E is Price-to-Earnings, Fwd P/E is next-twelve-month-price-to-earnings ratio, P/S is price-to-sales, and P/CF is price-to-cash-flow. 

Key takeaway: Polling numbers can propel a candidate into being a frontrunner, but their impacts on company cash flows are uncertain and hard to predict because campaign promises are not the same as presidential policies. With this backdrop, investors can take advantage of the temporary mispricing opportunities driven by political sentiment and seek to benefit from the health care sector’s steady growth in a late-cycle environment. For more on this topic, see two recent posts from our team: Spotting Trends and Uncommon Sense.

2020 Portfolio decisions
We are in a new risk regime where bull markets can be temporarily whipsawed by micro-bursts of volatility—and political machinations may be responsible  for the next brief drawdown. Ensuring that portfolios and investor mindsets are properly prepared may make this election cycle a bit more tolerable.

Continue following SPDR® Blog to keep up with my Charting the Market series and other market insights. You can also download our full monthly Chart Pack.


1The S&P 500 Index valuation metrics across P/E, Fwd P/E, P/S, and P/CF are in the top 10th percentile relative to the past 15 years as of January 31, 2020. Source: FactSet.


A measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.

S&P 500 Index
The S&P 500, or the Standard & Poor's 500, is an index based on the market capitalizations of 500 large companies having common stock listed on the NYSE or NASDAQ. The S&P 500 index components and their weightings are determined by S&P Dow Jones Indices.


The views expressed in this material are the views of SPDR Americas Research Team and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected.

The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.

All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information.

All the index performance results referred to are provided exclusively for comparison purposes only. It should not be assumed that they represent the performance of any particular investment.

Passively managed funds hold a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. Passively managed funds invest by sampling the index, holding a range of securities that, in the aggregate, approximates the full Index in terms of key risk factors and other characteristics. This may cause the fund to experience tracking errors relative to performance of the index.

Actively managed funds do not seek to replicate the performance of a specified index. The strategy is actively managed and may underperform its benchmarks. An investment in the strategy is not appropriate for all investors and is not intended to be a complete investment program. Investing in the strategy involves risks, including the risk that investors may receive little or no return on the investment or that investors may lose part or even all of the investment.

Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions.

Volatility management techniques may result in periods of loss and underperformance may limit the Fund's ability to participate in rising markets and may increase transaction costs.

A momentum style of investing emphasizes securities that have had higher recent price performance compared to other securities, which is subject to the risk that these securities may be more volatile and can turn quickly and cause significant variation from other types of investments.

Investments in small-sized companies may involve greater risks than in those of larger, better known companies.

Companies with large market capitalizations go in and out of favor based on market and economic conditions. Larger companies tend to be less volatile than companies with smaller market capitalizations. In exchange for this potentially lower risk, the value of the security may not rise as much as companies with smaller market capitalizations.

Value stocks can perform differently from the market as a whole. They can remain undervalued by the market for long periods of time.

Because of their narrow focus, sector funds tend to be more volatile.