The Bull Thread

Why Elevated Volatility Increases Odds for a Post-Election Rally


The stock market has been consistently hitting new records in September and October, despite what is typically a weak seasonal period for stocks. As Ryan discussed in his latest blog, stocks have had an incredible run this year (and last year), but there are several reasons to expect the bull market to continue. Momentum begets momentum for one thing, and now we’re running into the November-January period that is historically the best consecutive three months of the year. By itself, all of this raises the odds for the rally to continue over the next few months.

But There’s Fear
One thing that looks curious on the surface is that we’re seeing elevated volatility even as the market rallies, specifically in the “VIX” (CBOE Volatility Index). The VIX is widely regarded as the “fear gauge.” More specifically, it is the volatility that options traders expect for the S&P 500 over the next 30 days implied in options pricing. That means it’s impacted by what happens in options markets. Right now, there’s a lot of activity because of the election. Because of more “fear,” investors are buying put options on the stock market (akin to insurance on the S&P 500). This increased demand raises implied volatility, or VIX. Outside of the first week of August, the VIX is now close to the highest levels we’ve seen this year.



Elevated VIX Sows Seeds for a Post-Election Rally
When investors buy option hedges, or puts on the S&P 500, they’re essentially reducing their market exposure. At the same time, the person selling this insurance gains market exposure. These sellers are typically dealers who are not in the business of making a one-sided bet on the market (up or down). In order to neutralize the extra positive market exposure they get from selling put options, they short the index.

Fast forward to post-election. Assuming all goes well, and there’s no market pullback, a lot of these hedges (put option) are closed or expire worthless. At the same time, dealers will start to close out their shorts as well, which puts upward pressure on the index — you close out a short position by buying back the stock.

This is why odds favor a post-election rally, especially if the VIX starts to pull back, irrespective of which candidate wins the presidency.

Historically, changes in VIX are inversely correlated to S&P 500 returns. When the VIX is falling, returns are higher (mostly positive). Conversely, when the VIX is rising, i.e. fear is rising, returns are mostly negative.



Here’s another way to look at it. Historically, when the VIX drops more than 5 points in a month, the average S&P 500 return is 6%. When the VIX drops between 2 and 5 points, the average return is 2.8%. These are fairly significant returns for just one month. The average return gets smaller when the VIX changes are smaller and turns negative when the VIX starts to increase (especially by large amounts).

This inverse relationship between the VIX and S&P 500 returns is not perfect. And for all we know, we could see volatility rise after the election, especially if there’s a lot of uncertainty about the results that lasts into December (if not longer). But odds are, markets are pricing in some uncertainty already, and that’s being reflected in the elevated VIX.



History Points to Post-Election Rallies
Ryan has crunched the numbers for post-election periods over the last 70+ years, and historically, we’ve seen markets rally over the November – January period (and even beyond). It doesn’t matter whether the election was close (like 1960 and 2020) or if it was a rout, when one candidate won big (like 1984 or 1996). The average 3-month return (November-January) is 4.0% and the average 6-month return (November-April) is 5.3%.

The only times the market really went the other way was when the economy was in a recession, as in 2008 and 2020. Excluding these two periods, the average 3-month return is 5.7% and the average 6-month return is 7.4%.



As I noted at the top, this year is off to a strong start. There’s a very common notion that these returns may be “pulled forward,” but that’s not how momentum works. Strength, and momentum, beget more of the same. Plus, there could be the tailwind of falling volatility as hedges come off post-election. We could also see a lot of investors who didn’t participate in the year-to-date rally begin to chase the rally before the books close for 2024. These are some of the reasons why the upcoming period has been strong for markets historically, and there’s not much reason to bet against that this year, especially with the economy as strong as it is and the Federal Reserve continuing to cut rates.

 

November’s First Trading Day: DJIA, S&P 500 and NASDAQ Up 9 of Last 12

From data in the 2025 Stock Trader’s Almanac on page 90, the first trading day of November is the fourth best of all monthly first trading days since September 1997 based upon total DJIA point gained. DJIA, S&P 500 and NASDAQ have all advanced 13 times over the last 21 years. Average performance on the day ranges from a low of 0.04% by S&P 500 to 0.13% by NASDAQ over the last 21 years. Following a bearish streak from 2005 through 2011, all three indexes have been up 9 of the last 12 years. In presidential election years (screened in light grey), NASDAQ has been best, up four of the last five.

 

DJIA and S&P 500 Up 83.3% of the Time on Day Before Election Day

Looking back at the last eighteen presidential elections since 1952, the day before Election Day has a clear bullish bias. DJIA and S&P 500 have declined just three times and average gains of 0.57% and 0.48% respectively. NASDAQ and Russell 2000 are slightly weaker, but still bullish. Election Day (or the day after prior to 1980) leans bullish, but with a greater frequency of losses. Incumbent party victories are shaded in light grey and appear to have little to no impact on trading the day before or on/after Election Day. The end of election uncertainty is what appears to lift traders’ and investors’ spirits.

 

Republican Congress Matters. Not the President.

Election eve and the media is still hyper focused on the White House battle between former President Donald Trump and Vice President Kamala Harris. But deep-down Wall Street is really focused on who controls Congress.

Data from the 2025 Stock Trader’s Almanac shows who the President is doesn’t even matter. It’s who controls Congress, who controls the purse strings that matter most to the market. In fact, a Republican Congress & a Democratic President Is Best for the Market.

If you are trying to decide who you’d rather have in office based upon your stock market performance, you want a Democratic president and a Republican Congress. You have a more conservative body holding the purse strings - a little more progressive thinking coming up with new ideas in the White House. Here’s the data.

 

Presidential Election Day to Yearend Historically Bullish

With a clear winner decided the history of market gains from Presidential Election Day to Yearend is encouraging. As you can see from the tables above and below the market tends to rally from Election Day to Yearend with a few exceptions due to exogenous factors.

Profit taking at the end of 1984 kept stocks flat after the rally off the July bear market bottom in anticipation of Reagan’s landslide reelection victory. The infamous undecided election roiled stocks at the end of 2000 amid the 2000-2001 dotcom bear market. The Great Financial Crisis and 2007-2009 generational bear market plunged further in late 2008 on shrinking economic data and uncertainty over a change in party and the new incoming, unknown Obama administration. The mushrooming European Debt Crisis had the stock market on edge in late 2012.

But overall, from Election Day to Yearend DJIA is up 72.2% of the time with an average gain of 2.38%. S&P 500 is up 66.7% of the time with an average gain of 2.03%. NASDAQ is up 76.9% of the time with an average gain of 1.50% and Russell 2000 is up 61.5% of the time with an average gain of 4.93%.

 

The Day After...2016 Redux
Wed, Nov 6, 2024

US equity markets are up big today after President Trump's victory in last night's election. The average stock in the Russell 1,000 is currently up 2.17%, while the Financials sector ETF (XLF) is up more than 5% on the day.

While many market prognosticators went into the 2016 election saying that a Trump victory would be terrible for the stock market, the same upside reaction that we're seeing today occurred on the day after Trump's victory in 2016. (And as a reminder, Dow futures fell 1,000+ points immediately following Trump's victory back in 2016 before eventually flipping sharply higher.)

The underlying action in the stock market today looks remarkably similar to the action we saw on this same day in 2016.

Below is a look at the average performance of stocks in the Russell 1,000 today broken out by sector versus how they performed on the day after the 2016 election.

The three sectors that are selling off today are the same three that sold off following Trump's win in 2016: Real Estate, Utilities, and Consumer Staples.

On the flip side, the three sectors performing the best today are the same three that performed the best in 2016: Industrials, Energy, and Financials.

Notably, the three best and worst performing sectors today were also the three best and worst performing sectors on the day after Trump won in 2016.

In the middle of the pack, we're seeing Technology and Communication Services outperform their 2016 action today, although Communication Services didn't have some of the big social media companies in it eight years ago. And Health Care and Materials -- while still up -- aren't performing as well today as they did back in 2016.





While it may be tempting to pile into the three sectors performing the best today because of Trump's victory, the three sectors that performed the best on the day after Election Day 2016 ended up being some of the worst-performing sectors during Trump's first four-year stint in office.

As mentioned above Financials, Energy, and Industrials were the three best-performing sectors on the day after the election in 2016, and they're also the three best-performing sectors today. As shown below, though, Energy (XLE) would go on to fall 49% from the day after the 2016 election through the day before the 2020 election, while Financials (XLF) was the second worst sector ETF during that time frame and Industrials (XLI) was on the lower end of the performance pack. On the flip side, it ended up being Technology (XLK) and Consumer Discretionary (XLY) that performed the best between the 2016 and 2020 elections even though they weren't big standouts on the day after the 2016 election.



As far as the action goes today, Financials are soaring. Below is a look at the 20 best-performing stocks in the Russell 1,000 so far today. 14 of the 20 are from the Financials sector, and all of them are up more than 12%. Outside of the Financials, Tesla (TSLA) is also on the list with a gain of more than 13%. Given Elon Musk's very vocal support of President Trump this election cycle, the action in TSLA should come as no surprise.

 

Will International Stocks Ever Outperform Again?
Wed, Nov 6, 2024

On the heels of last night’s election results, we’ve seen some major moves in equities on a global scale. While the S&P 500 is up over 2% today, the MSCI All Country World Ex-US Index ETF (CWI) is down slightly more than 1%. Since the CWI ETF first launched in 2007, today would be just the fifth time it fell over 1% on the same day the S&P 500 ETF (SPY) rallied more than 1%. The other days were 1/28/08, 11/9/16, 2/24/22, and 10/24/22. Even more notable is that there have only been two other days when the daily performance spread between the two ETFs (in favor of SPY) was wider – during the Financial Crisis two days after the 2008 election on 11/6/08 and the day after the Brexit vote on 6/24/16. It’s been a historic day.



Today’s performance gap begs the question of whether international stocks will ever outperform again. The chart below shows the relative strength of the US (SPY) versus the rest of the world (CWI) since the latter ETF’s launch in 2007. Outside of a few years after it first started trading when international stocks performed roughly in line with the US, it’s been a one-way move in favor of US stocks for over a decade now, and today’s move only added fuel to the US rocket ship. There will come a time when international stocks have their day in the sun, but international investors aren’t sure how long they can hold their breath.

 

10 Quick Election Takeaways


Well, election day is now behind us, and while there’s some dust to settle yet, we now know a lot this morning. First, President-elect Donald Trump will be the 47th president of the United States, joining Grover Cleveland as the only president to win non-consecutive terms. Trump also won the popular vote for the first time in his three elections. We deeply respect the office of the presidency and congratulate President-elect Trump on his victory and Vice President Kamala Harris on her hard-fought campaign.

Second, Republicans will control the Senate. Given they will have the tie-breaking vote from Vice President-elect JD Vance, they only needed to flip one seat. Republicans were a heavy favorite to flip a seat before the evening started, and the West Virginia win was called early. Then came a pick-up in Ohio. Republicans were able to defend what was likely their most vulnerable seat in Nebraska and added Montana late in the evening. There are still tight races in Michigan, Pennsylvania, Wisconsin, Arizona, and Nevada that may take days to sort out, but Democrats are defending seats in all of them, so it won’t change the basic outcome.

Third, the House is still close with many tight races and it may take a week or so to know the outcome. But it was a good night for Republicans, which justifies a reasonably strong bias toward Republicans taking the House as well. But it’s legitimately still up in the air.

As always, from the perspective of the guidance we try to provide we are not interested in politics but policy and only policy that we believe will have an impact on market behavior.

In my opinion, there are our 10 quick election takeaways, 6 on the policy side, and 4 related to markets:

Election Takeaways – Policy Impact

1. Republicans will go big on deficit-financed spending, but markets like deficits (as we pointed out even in our Midyear Outlook), at least in the near term. If they lose the House this will be tempered, but a Republican sweep will likely lead to a full extension of individual tax cuts from the Tax Cuts and Jobs Act (TCJA), reinstatement of the small set of business tax cuts that were scheduled to sunset, and even add a few new tax cuts. There is little risk at this point that we will go over a fiscal cliff.
   
2. The debt ceiling will be raised, without much noise or market volatility.
3. Tariffs will go up, but there’s a difference between making campaign promises and governing and we are unlikely to see some of the more extreme proposals floated during the campaign. Also, once tariffs are announced, and other countries counter with their own tariffs, companies will likely adapt. Keep in mind we had a lot of tariffs even over the last four years under the Biden administration.
   
4. The general regulatory policy will be strongly pro-business with a strong bias toward deregulation. This is likely to have the largest impact on the most highly regulated sectors of the economy, such as energy and finance, though be careful translating this to market outperformance (energy and financials lagged the S&P 500 between 2017 and 2020).
5. Defense spending will increase, something we thought likely no matter who was elected.
   
6. Without judging whether it is good policy in general, immigration policy will limit labor supply of both skilled and unskilled workers, acting as indirect ramp-up of the regulatory burden on businesses by limiting who they are able to recruit and hire along with any added regulatory burden in maintaining their employment.

Election Takeaways – Market Impact

1. The overnight reaction of markets provides a clear sense of what the market perceives to be “Trump trades.” There is reason for caution about this initial reaction (see below), but it still tells us something about the expected policy influence on the market environment. We have to emphasize that these are not recommendations but simply factual observations:
   • US equities are rallying strongly while international equities are seeing modest declines.
   • Small caps are up very sharply (!) this morning, climbing significantly more than their large cap peers at last check.
   • The financials sector is seeing strong support.
   • US Treasury yields are higher, likely reflecting both higher growth and inflation expectations.
   • The US Dollar is rising against most major currencies.
   • Cryptocurrencies have seen broad support, with Bitcoin hitting an all-time high overnight.
2. As we’ve been saying all along, there’s no real historical evidence that which party occupies the White House has a broad impact on stock performance. Nevertheless, decisive resolution of the fiscal cliff and the supply side impact of tax policy are likely to help extend the expansion and support the bull market.
3. A Republican president with a Republican House and Senate is one of the worst market combinations historically. But even if Republicans end up sweeping the election, we believe narrow majorities in the House and Senate would give Congress some features of split government, since narrow majorities give centrists more power.
4. As we saw in 2016, the policy impact of a new president on markets can give way to broad macroeconomic forces fairly quickly. Yes, energy did well in the first month after Trump was elected in 2016, but it collapsed over the rest of the year and was by far the worst-performing sector over his presidency.

The story of macroeconomic forces is re-enforced if you compare election-to-election returns for President-elect Trump and President Biden. These outcomes aren’t what you would expect from a policy perspective.



We believe Carson Investment Research recommendations were well positioned for either election outcome, but last night’s outcome may be particularly friendly in the near term. We are overweight equities and underweight bonds (limiting the impact of higher rates), overweight US stocks with an emphasis on US small and mid-cap stocks versus benchmarks, and underweight emerging market stocks. We also have dedicated financials sector exposure in more tactical models.

Obviously, the election news is very recent and it will take time to fully assess the outcome. Our goal, as always, is to try to provide thoughtful, actionable advice for any policy environment. We will continue to provide updates on our post-election thoughts as markets, the election outcome, and President-elect Trump provide more clarity.

 

Nine Interesting Things to Know About the Election


“It’s tough to make predictions, especially about the future.” Yogi Berra, Yankee great and Hall of Fame catcher

It is official, Donald J. Trump will become the 47th President of the United States. This of course is the second time he did it, joining Grover Cleveland as the only people to ever become President twice, but not in consecutive terms.

Barry Gilbert, VP Asset Allocation Strategist, wrote this excellent blog on 10 Quick Election Takeaways that I suggest you read (after you read my blog first of course ). In today’s blog I wanted to build on what Barry wrote, sharing what I found to be interesting these first few days after the election.

Don’t Mix Politics and Investing
We are aware that this decision likely is about as polarizing as could be for many of you. Half the country is thrilled, while the other half is angry and disappointed. I’ll keep this part fairly simple. As a steward of assets our job isn’t to get worked up over the election, but to do the best thing for our clients and the money we run for them.

And doing this shows that who is in the White House has virtually no link to how the stock market will do. Yes, technically returns are a tad better under Democratic Presidents than Republicans, but the flipside to this is stocks do much better when Republicans control both chambers of Congress compared to when both chambers are blue. Look at the past few Presidents for example. A lot of people didn’t like President Obama and stocks did great. Many didn’t like President Trump and missed out on big gains. Then many didn’t like President Biden and stocks have been on the past two years.

Here’s a neat chart that goes back to 1900 showing that stocks tend to go higher, regardless of who is in the White House.



What Happened?
Safe to say the majority of the pollsters out there were way off, yet again. We had a pollster saying Iowa (Iowa!) could go to Vice President Harris?! That one didn’t make any sense to me then and it sure doesn’t now.

Go read the Yogi quote up top one more time to see how hard it can be to predict the future, as virtually no one had Trump winning like he did. Many noted how the 2022 midterms came in much closer to expectations and maybe this time so would the presidential election, but this is yet another election involving President Trump that saw his eventual numbers come in better than expected, similar to 2016 and 2020.

President Trump is projected to win 312 electoral votes compared with Vice President Harris’s 226. This is more than the 304 he won in 2016 and more than the 306 President Biden won in 2020. It is the most for a Republican President since 1988, but it trails the 365 (2008) and 332 (2012) President Obama won in his two elections.

The big surprise though was Trump won the popular vote as well, the first Republican to do this since 2004. He is up to more than 72 million votes, which will go higher once Arizona and Nevada become official. Interestingly, Democratic votes dropped from a record 81 million four years ago to 67 million this go around, although complete California results should increase that a little.



Why Did It Happen?
There were seven swing states that were going to decide the election and President Trump won every single one of them. Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin all voted Republican.

Without being too obvious, President Trump received a lot more votes than expected. But looking at the exit polls it is clear that one group where he did much better than expected was married woman, which came in at 51% voting for President Trump. While Hispanic and Black men also voted at a much higher clip for President Trump than in the past.

Stocks Loved the News
Optimism over lower taxes, deregulation, animal spirits, and improved small business confidence all sparked a huge stock rally, with the Dow up more than 1,500 points for the fourth largest point gain ever, while the 3.6% gain was the best in exactly two years.



The S&P 500 soared 2.5% the day after the election, which was the best post-election day ever. Be aware though, it also jumped 2.2% when President Biden won in 2020. The last eight elections stocks moved at least 1% the day after the election, so post-election day volatility is normal.



Small caps were the big winner on the day though, as the Russell 2000 gained nearly 6%, for its best day since November 2022. This was interesting, as yields soared and the past few years have seen higher yields as a negative for small caps, but optimism over lower taxes sparked the rally. As longtime readers and followers of our team might know, we’ve been bullish on small and midcaps all year and this very well could be just the start to a much better period for these names.

There Was No Post-Election Uncertainty
Another reason stocks soared yesterday was there was no long and drawn out drama around who would win. Here’s something that took me many years to learn. Stocks can take good news, they can even take bad news, but they can’t take uncertainty.

Many of the same polling experts were telling us it might take many days (or even weeks) to get the results. Instead, it was clear President Trump was going to win and as a result stocks gained as another potential black cloud was lifted.

Yields Soared
The 10-year yield continued to move higher, just as it has done since the Fed cut rates in September. In the end, the 10-year yield added 0.14 points to close at 4.43%, the highest level since July. This sent bonds tumbling, as remember that higher yields hurt bond prices and vice versa.

Potential higher deficits, more spending, better economic growth, and tariffs (which are potentially inflationary) were all cited as reasons for the move higher. Perfect world, you don’t want yields to continue to move much higher, as it would hurt the housing market and potentially small companies as well.

The bottom line is yields have moved drastically higher since the Fed cut rates in September and we think there’s a good chance this move has gone too far and lower yields could be coming over the coming months.



So What Really Matters?
Of course, who is in the White House matters, but there are things that matter a lot more for investors. How the economy is doing, Fed policy, inflation, valuations, and overall market trends potentially matter much more.

Right now we are looking at an economy that is outperforming and showing no signs of slowing down. Productivity is at some of the best levels since the late ‘90s. We have a stable, but slowing, labor force. Earnings are at record levels. The services sector (which make up more than 60% of our economy) is very strong. And not to be ignored, the Fed is quite dovish. When you combine all of these factors, you can see why we’ve been so bullish the past two years, and why we remain bullish currently.

Lastly, aggregate income growth is running at a 6.4% annualized pace over the past three months. That’s well above the 4.1% pace we saw pre-pandemic. When people are employed and their income is growing well above inflation, you have a big driver for continued solid economic growth.



The Podcast Election
This was likely the first election where people consumed much of their information on the candidates from places other than traditional media. It is appeared that the majority of headlines about President Trump were negative while the majority for Vice President Harris leaned positive, yet more than 70 million people voted for President Trump. How in the world did this happen? The simple answer is people stopped listening to traditional media and instead got to know the candidates in long form podcasts. Millions listened to President Trump for three hours on Joe Rogan and may have decided they liked his demeanor and his take on what was needed to help our country. Vice President Harris had the opportunity to also join the world’s most popular podcast with Joe Rogan but decided against it. I personally think this was a huge missed opportunity. On election night one reason offered for why she did poorly was the country just didn’t get to know her yet. Four years as the VP you’d hope people knew her, but there’s some truth there and more unscripted, long form discussions could have really helped, in my opinion.

In four years we will still have traditional debates, but who’s to say Joe Rogan (or whoever the next big podcaster is) doesn’t have both candidates sit down for a multi-hour podcast with no scripts? I think it is closer to happening than many think and I’d be all for it.

Now What?
We continue to expect a year-end rally, as the truth is many have been underinvested (and too heavy into cash and bonds) and have missed much of this historic rally. Could there be a chase into the end of the year? Yes, we think there sure could be.

In fact, previous years that were up at least 17.5% heading into the final two months NEVER saw those final two months lower, higher 14 out of 14 times, with November up 12 times and December up 11 times. The bull might have a few more tricks up his sleeves.



Looking at the past 10 elections we found that stocks were higher a year later after nine of them, and up more than 15% on average. Rallies after elections have been quite common the past 40 years and we think this time will likely follow this same pattern.



Our Hope
Our country is divided and raw right now. Although hope isn’t a strategy, we hope those differences can be mended over the coming months. In the end, we really aren’t that different and we need to get back to that. Being passionate about politics is important, but so is enjoying your life. So many people are miserable all the time over politics and I’d like to think the only people who should be miserable all the time are Chicago Bears fans (that is just a cursed team). If your candidate won, stay humble and know people are hurting. If your candidate lost, know those that voted against you did so because they believed in a change and it wasn’t because they were racist or ignorant.