Elections and Markets - A Historical Perspective
The first half of 2024 has surprised many with its steady FX market movement. This calmness is expected to persist even with a busy election season featuring the highly anticipated US presidential race, alongside the French and South African elections.
Traditionally, elections haven't always guaranteed volatile currency markets. Data shows the Dollar Index (DXY) and the VIX (volatility index for the S&P 500) often remain subdued during elections. The 2008 financial crisis and the unique COVID-19 pandemic are notable exceptions. Still, excluding these outliers, election years have generally been calmer for markets.
Below is a graph depicting VIX volatility from 2003 to 2020.
Why This Matters
Understanding this history empowers investors to make informed decisions. There are better strategies than focusing on historical outliers of high volatility in a currently stable environment.
Beyond Elections
While elections can stir emotions, other factors have a more significant impact on market volatility. Here's a look at some possible reasons for the observed calm during past elections:
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It's a Multi-Faceted Landscape
It's important to remember that these are just a few potential explanations. The specific factors influencing VIX volatility can vary depending on:
The Takeaway
Upcoming elections might grab headlines and cause short-term currency movements. Still, evidence suggests the FX market may continue its current trend of relative stability.
The 2024 US elections will be quite different from previous ones, given that there are major policy differences between the red and blue camps; however, I would not bet on crazy swings.