Election years are like adrenaline shots for the markets, and 2020 was no exception. The last presidential race set the markets on a wild ride while traders grappled with pandemic woes and big policy possibilities. Market participants were glued to their screens, watching the Nasdaq rally as the Senate stayed red and monitoring the VIX’s ups and downs as clarity crept in.
With the 2024 election just around the corner, here’s how to get your trading prepped for the potential frenzy.
A Look Back: Market Rollercoaster in 2020
The 2020 U.S. presidential election brought a lot of volatility to financial markets, with sharp movements in stocks, futures, Treasury yields, and the VIX. Traders had to deal with a highly contentious and uncertain political landscape on top of pandemic-related economic instability. The elections also brought about expectations of major yet radically differing policy changes.
Let’s take a closer look at what happened in the markets around election time – 2020.
5 Key Market Movements in 2020
- Stock Market Rally on Divided Government
The Nasdaq and S&P 500 rallied as it became clearer that Republicans were likely to retain control of the Senate. This outcome, which ensured a divided government, relieved fears of aggressive corporate tax hikes and a limit to significant regulatory actions against major technology firms, such as potential antitrust measures targeting companies like Google and Amazon. - Volatility Trends and the Role of VIX Futures
The CBOE Volatility Index (VIX) surged leading up to the election but gradually declined as the election outcome became clearer. The decline in volatility reflected the market’s relief at the avoidance of worst-case scenarios, such as civil unrest or weeks of contested results, at least beyond that which we experienced. - Treasury Yields and Safe-Haven Demand
Early in the election week, Treasury yields fell as traders sought safe assets amid uncertainty. However, yields rebounded when Biden’s lead solidified, suggesting a clearer outlook for fiscal policy and future economic stability. - Mixed Performance Across Sectors
During the 2020 election, financials and industrials underperformed as traders anticipated stricter regulations and higher taxes under a potential Biden administration, dampening enthusiasm for these sectors. Industrial stocks, though expected to benefit from future infrastructure spending, faced short-term uncertainty. In contrast, technology stocks surged, fueled by pandemic-driven demand for remote work and e-commerce solutions. The expectation of political gridlock in Washington further boosted tech, as traders saw a reduced risk of aggressive regulatory actions, prompting portfolio shifts toward the sector, which was less reliant on fiscal policy changes. - Global Market Reactions
Following Biden’s projected win in the 2020 election, European and Asian markets rallied, driven by reduced political uncertainty and optimism about improved U.S. trade relations and global cooperation. Wall Street also welcomed the expectation of continued low interest rates, supporting equities worldwide. Biden’s anticipated shift from Trump’s isolationist policies toward more stable international partnerships further boosted sentiment, with markets reflecting confidence in the prospects for multilateral cooperation and economic recovery.
Although economic and political situations are nuanced and differ from one instance to the next, what general takeaways from the 2020 election can we apply to the upcoming one?
How to Get Market-Ready for 2024
With the 2024 election on the horizon, understanding how markets behave during the 2020 election provides key insights. Here are some strategies and considerations for investors and traders to prepare effectively:
- Expect Volatility and Hedge Accordingly
The VIX’s behavior in 2020 suggests that election periods are inherently volatile. Consider hedging strategies to manage risk during the election week. - Watch for Policy and Sector-Specific Impacts
Traders should closely follow campaign platforms for potential policy changes. For example, regulatory shifts could impact sectors like technology, financials, and energy. Adjusting sector allocations ahead of potential outcomes can give you an edge. - Prepare for Market Overreactions and Corrections
Market sentiment can swing sharply in reaction to election developments. The 2020 rally in tech stocks after the election was driven by traders unwinding trades based on pre-election fears of a “blue wave” that did not materialize. Being aware of these dynamics can help you avoid, or in the case of day traders, exploit, any overreaction to news. - Anticipate Treasury Yield Fluctuations
As seen in 2020, Treasury yields are sensitive to both election uncertainty and policy expectations. In 2024, yields may respond similarly, especially if there are concerns about fiscal stimulus, debt policies, or changes to Federal Reserve leadership. - Monitor Senate and House Races for Clues on Market Sentiment
The 2020 election showed us that market sentiment isn’t just about the presidency but also about which side controls Congress. A divided government may be viewed positively by markets, as it limits extreme policy changes. Traders should factor in Senate and House races when assessing potential outcomes for 2024. - Plan for Short-Term and Long-Term Scenarios
Markets are forward-looking, but uncertainty can lead to short-term volatility. Having a short-term trading plan and a long-term investment strategy can be helpful.
So, what’s the bottom line for 2024?
Expect another round of market shake-ups, complete with volatility, political drama, and sector swings. Keep your eye on policy shifts, hedge for the chaos, and remember—big moves don’t stop with the presidency. Congress holds just as many market cards. With the right strategies, you can dodge or exploit the noise and make the most of this year’s election-driven market opportunities. Happy trading!
Please be aware that the content of this blog is based upon the opinions and research of GFF Brokers and its staff and should not be treated as trade recommendations. There is a substantial risk of loss in trading futures, options and forex. Past performance is not necessarily indicative of future results.