Will F. from Memphis, TN asks: Mitch, I’m wondering if you can set some kind of expectation for the type of volatility we can expect post-election. I’m personally worried about how everything is going to shake-out in the next couple of months.
Mitch’s Response:
Thanks for writing, Will, and I know a lot of other readers share your concern. Just looking back at history, we know that even without worries about voting and a contested result, volatility has been associated with recent elections. Looking back at the last seven U.S. presidential elections, the CBOE Volatility Index (VIX) has risen an average of approximately four points in the month leading up to election day.1 This election is obviously different.
Just last week, we saw the stock market posting fairly pronounced up and down moves, which readers should remember is the definition of volatility. Many folks think about volatility just as downside moves, but volatility works both ways. Last week, the market was dealing with a confluence of earnings, economic data, fresh European economic restrictions, and intensified media coverage of record Covid-19 cases and a surge in hospitalizations that all hit the tape at once.
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Even with election day behind us, I think we should reasonably expect volatility to continue over the next few weeks – which to me means the likelihood of investor missteps will also go up. The investment community tends to view volatility as an opportunity to take gains off the table, to trade in-and-out of stocks in an effort to ‘buy the dip,’ or in some cases, as a reason to avoid investing in stocks altogether. But I think these approaches tend to result in mistakes – which can ultimately detract from long-term returns.
Take the approaches of trading in-and-out of stocks to either generate profits or to buy stocks that have pulled back. Even though market volatility often presents itself as an opportunity to make some strategic changes, investors often forget that volatility works both ways (up and down), is very unpredictable, and often happens in clusters. Selling pressure one week may not mean selling pressure the next, and investors can get caught waiting for a trade that never materializes.
When it comes to the election results, I think there is a distinct possibility that the fear of a messy outcome may very well outweigh the actual risk of some kind of political ‘Armageddon.’ What’s more, the stock market may already be pricing-in a contested result and some abnormal transfer of power. We just can’t know.
Rising volatility coupled with a very noisy news cycle will almost certainly increase the investor’s desire to “do something,” or to make changes or trades in investment portfolios. But doing so tends to lead to more mistakes, in my view, which can ultimately detract from long-term returns.
As
volatility in the market continues over the next few weeks, understand that you
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Disclosure