U.S. Markets Rally Ahead of Election Day on Promising Economic Data

October selling turned into buying as November blew in big gains the day before the U.S. election. The DJIA rallied 1.6% as economic reports continued to show strength in the U.S. and around the world. European markets rallied on firm economic data despite partial lockdowns throughout the continent. Big Tech stocks like Apple (AAPL), Amazon (AMZN), and Facebook(FB) continue to see a sell-off, as do the work-from-home wonder stocks like Zoom (ZM). 

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Election weeks bring out the volatility, but history tells us it doesn't stick around too long. This year might very well be different, but there are a lot of patterns between 2020 and 2016 worth examining (more below). History also tells us that November is a great month for stocks — especially in an election year. But we are only one day in, so we won't get ahead of ourselves.

Strong stock markets usually benefit incumbent presidents, but this has been a very peculiar four years, and 2020 has capped it off. Buckle up for a wild week.

Had Enough of the Volatility?

It's not going anywhere soon and it's likely to peak later this week as the election results become the battleground. But if history is correct, it should subside by next week. Nick Maggiulli crunched the numbers for his blog Of Dollars and Data to learn that while presidential elections do have a noticeable impact on the markets, the size and duration of that impact seem to be limited in nature.

While volatility is high in the days and weeks leading up to an election, it doesn’t seem to persist in the week after it. 2020 may be very different given that this election is likely to be contested and we may not know who the next president will be for days or weeks. We are also in the middle of a pandemic, so historical patterns have not completely held up this year. But there is a reason to be hopeful.

'History Doesn't Repeat, But it Often Rhymes'

That's what Mark Twain said, and he's more right than not. But you cannot argue with the similarities between the way markets are behaving leading up to Election Day in 2020 and 2016.

In 2016, Hillary Clinton had a large lead in the polls, although President Donald Trump was starting to close the gap. Most investors had assumed her victory and a split Congress. When Trump got elected, everyone assumed we would immediately fall into a recession and a bear market. They were right on one count, very wrong on the other. The S&P 500 fell 3% in the 10 days after Trump was elected, then recovered. We eventually fell into a recession and bear market, but it had nothing to do with the 2016 election.

So What?

The point is that a sell-off in stocks is not uncommon leading up to big political events, but once investors move past the headline risk, markets tend to stabilize, absent a black swan event.

Good Times Ahead?

Since we are in a historical mood today, it's worth bringing up the fact that election years tend to leave markets on a high note. According to LPL Financial, November is the best month of the year for the S&P 500 in an election year. December is the third best month. 

Don't Worry ... Do Nothing

As always, past returns are no guarantee of anything, but statistics, like the ones we have shared today, all tell a similar tale. In the moment, markets and investing can seem chaotic. This can lead individual investors like us to sometimes feel compelled to do something to our portfolio or investing strategy. The truth is, we are better to take our hands off of our portfolios and wait these events out. We'll never be able to time the right move and, more often than not, we end up hurting our returns. Josh Brown, aka The Reformed Broker, puts this into terrific perspective on this week's episode of The Investopedia Express podcast.