US Election & Portfolio Dynamics: Insights for Investors

Leveraging S&P Global Market Intelligence’s  Buy-Side Risk Solution to Analyze Impact of Market Fluctuations amid the Upcoming US Presidential Election

Mohamed Amine Chraibi, Credit and Risk Solutions

Elections can lead to market volatility, as investors face the potential for major policy shifts and their economic impact. The unpredictability of outcomes can spark wild fluctuations. This article dives into how U.S. elections shape market dynamics, exploring key scenarios such as Predicted Winner, Upset Victory, and Tightly Contested Race. By leveraging S&P Global Market Intelligence’s Buy-Side Risk (BSR) solution, we use inference stress testing on a set of hypothetical portfolios under three different scenarios to create actionable insights. This equips investors to navigate the volatile intersection of politics and finance, enabling them to make informed decisions in a constantly evolving environment.

Key Takeaways

• Navigating market dynamics during election periods poses unique challenges due to the complex interplay between portfolio-specific risk factors and those shaped by the electoral landscape.
• Inference stress testing is a powerful tool that allows investors to model the portfolio impact of market-reaction scenarios. It leverages established relationships of the current market regime - correlations – to re-price a portfolio with respect to a core set of factors shocks.
• When election results align with pre-election expectations markets typically react favorably. This stability fosters investor confidence, leading to strong performance across core sectors such as technology, financials, and energy. Predictability leads to a positive investment climate.
• Conversely, upset victories—when results diverge from polls—can unleash a wave of volatility, leading to sharp market fluctuations as investors grapple with uncertainty. In such scenarios, sectors that rely heavily on regulatory stability may experience significant declines, reflecting immediate market anxiety and a reassessment of risk.

Introduction

During election seasons, investors anticipate significant policy changes and economic disruption, which is why financial markets are known for being particularly volatile and unpredictable. The anticipation of a new administration fuels intense speculation, often catching even experienced investors off guard with the market's unpredictable swings. Election cycles have typically been marked by greater volatility. In the 2016 presidential election, for instance, futures for the Standard & Poor’s 500-stock index initially plunged 5 percent but recouped nearly all their losses the following day. Similar to the high level of uncertainty around the outcome, the 2020 competition was marred by market volatility.

Predicting the impact of U.S. elections on the market dynamics has historically proven to be quite challenging, as the market's response can vary significantly based on the prevailing expectations of investors. In this article, we aim to explore how the market reacts under different circumstances, particularly focusing on scenarios where investor expectations align or diverge from actual election results. Research indicates that economic policy uncertainty (EPU) increases significantly during election years, particularly when elections are close or polarized, which can influence investment decisions and overall economic activity (Azzimonti, 2024)[1].By analyzing historical data and case studies, we seek to shed light on the complex dynamics at play, highlighting how uncertainty and surprise can lead to distinct market behaviors following electoral outcomes.

To conduct this analysis, we reviewed the outcomes of the last ten U.S. elections since 1984, along with the significant shifts that occurred in the 100 days following each election and then established three scenarios: the Predicted Winner, the Upset Victory, and the Tightly Contested Race. These scenarios, grounded in historical data, provide a structured framework for assessing how different election outcomes can influence market dynamics.

We also constructed a set of hypothetical portfolios primarily composed of equities and fixed income securities, which we evaluated under multiple shock scenarios, including interest rates, foreign exchange, credit spreads, and equities. The effects of these scenarios were examined across key regions, particularly the U.S. and EU, to offer a comprehensive view of the election's impact on global markets.

To perform this analysis, we leveraged the stress testing capabilities of the S&P Global Market Intelligence Buy-Side Risk (BSR) solution, using an inferred modelling approach. This method enables us to define a core set of risk factor shocks and utilize correlations from a specified historical window to infer their impact across all risk factors in a portfolio. By combining this with a full-revaluation approach, we can re-value the portfolio under the stress scenario and assess the resulting profit and loss (P&L) impact.

Figure 1: Stress Testing and Scenario Analysis with the Buy-Side Risk Solution

Three Hypothetical Scenarios for US Presidential Elections

When analyzing historical US elections, we can establish three main scenarios that could help us understand how different outcomes can impact the financial market.

• The first is the Predicted Winner, where the election results align with what pre-election polls suggested.
• Then there’s the Upset Victory, which highlights unexpected outcomes that diverge from anticipated results.
• Finally, we have the Tightly Contested Race, where candidates go head-to-head in a close race.

These scenarios, backed by historical data, provide a structured framework for understanding how different election outcomes influence market dynamics. We can apply this classification to the last ten U.S. elections since 1984, as summarized in the table below.

Table 1: Classification of the Last Ten U.S. Elections Since 1984 into Predicted Win, Upset Victory, and Close Race

By understanding these scenarios and the differing priorities of political parties, we can gain valuable insights into how elections influence economic conditions and investor behavior.

Scenario 1: Predicted winner

In a scenario where election results align with pre-election polls, the market dynamics can significantly shift depending on the policies of the winning party. In this scenario, we consider that investors had the benefit of certainty and a clearer roadmap on the upcoming policy direction. This predictability allows markets to react more calmly, often leading to a gradual adjustment of asset prices based on expected policies.

Table 2: Market Shifts Following Predicted Election Outcomes

In summary, the alignment of election results with pre-election polls markets tend to exhibit stability. Historical trends suggest that when markets have a sense of certainty, sectors aligned with expected policies often perform well, leading to positive investor sentiment and robust market performance.

Scenario 2: Upset Victory

In the context of an upset victory, where U.S. election results diverge from pre-election polls, the market response can be markedly different compared to scenarios where the election outcome aligns with predictions. Generally, when results deviate from what was anticipated, this creates an environment of uncertainty and volatility, significantly impacting investor sentiment and market dynamics. One outstanding example is the 2016 American presidential contest. Market projections and polls mostly projected a different conclusion; when the actual results deviated from these expectations, markets underwent instantaneous and major upheaval. According to a survey conducted by the CFA Institute, over half of U.S. investment professionals expected a positive impact on business post-election, with 85% anticipating a sharp increase in bond yields and 62% predicting a rise in U.S. equities^[1]. However, the unexpected outcome led to immediate market volatility, illustrating the disconnect between anticipated and actual market behavior (CFA Institute, November 2016).

Table 3: Market Shifts Following an Upset Victory, I

Overall, the stark differences between market reactions to upset victories versus predicted wins underscore how investor sentiment is shaped by certainty versus uncertainty. In cases of expected outcomes, markets tend to exhibit more confidence, leading to stronger returns across equity indices, steadier interest rates, more stable currency rates, and tighter credit spreads. Conversely, the unpredictability associated with an upset victory often results in mixed signals, increased volatility, and a more cautious market environment.

Scenario 3: Tightly Contested Race

In a tightly contested race where U.S. election outcomes are uncertain based on pre-election polls, market dynamics can exhibit significant volatility depending on the policies the winning party will adopt. A clear example is the 2020 election, which saw closely contested polls with no definitive winner until the results were announced, leading to marked market volatility that reflected the substantial uncertainty surrounding the outcome. The immediate aftermath of a tightly contested race often involves a wait-and-see approach among market participants. Uncertainty surrounding the incoming administration's policy priorities can prompt caution, resulting in lower market activity which can increase price fluctuations and create a general sense of unease in the markets.

Table 4: Market Shifts in Response to Uncertain Election Outcomes

In summary, while predicted winner scenarios generally foster confidence and stability in market dynamics, and upset victories introduce significant unpredictability and risk reassessment, tightly contested races can create a unique volatility influenced by the uncertainty surrounding the electoral outcome. The market reactions in these scenarios underscore the complexities of investor sentiment, as perceptions of risk and uncertainty often outweigh anticipated benefits.

Running Scenarios to Estimate Portfolio Impact

Now we have defined our core risk factor shocks representing the three different scenarios, we can run a set of inference stress tests on our hypothetical portfolios representing various asset classes.

Predicted Winner: Stability and Confidence

1)  Analysis by Portfolio

Figure 5: Summary of Impacts (%MTM) following the 100-day after the election for a Selected Hypothetical Portfolios for the Predicted Winner Scenario

The graph illustrates a comparative analysis of fund performance under the "Predicted Winner" election scenario, highlighting the best and worst outcomes for various investment portfolios. The Global Equity Fund stands out as the top performer, achieving the highest positive returns probably due to its diversification across multiple markets and sectors, which mitigates risk and enhances performance. Increased investor confidence from predictable election outcomes encourages allocations into globally diversified equities, allowing the fund to capitalize on growth opportunities in favorable market conditions. In contrast, the US and EU Equity Funds demonstrate moderate performance, reflecting their limited exposure to the broader gains available from global diversification, which results in missed growth opportunities. Meanwhile, the US Treasury Fund and Short Duration Bond Fund provide stable, low-risk returns, appealing to risk-averse investors seeking safety and predictability in a stable environment. These funds typically invest in government securities or short-duration bonds, making them less sensitive to market fluctuations and allowing for modest gains while preserving capital.

2)  Drill down by Fixed Income Instrument Type

Figure 6: Summary of Impacts (%MTM) following the 100-day after the election by Instrument Type for the Predicted Winner Scenario

This graph illustrates how different instrument types respond to the "Predicted Winner" scenario, providing a detailed breakdown of portfolio composition and performance across various asset classes.

This graph illustrates how different instrument types respond to the "Predicted Winner" scenario, providing a detailed breakdown of portfolio composition and performance across various asset classes. In this scenario, US Treasury Bonds and US Government Bonds emerge as the best performers, achieving returns of 4.44% and 4.89%, respectively, reflecting strong investor confidence driven by the stability and predictability of anticipated policies. This favorable economic environment enhances their appeal as secure investments, making them attractive for risk-averse investors seeking capital preservation. In contrast, US Corporate Bonds show a moderate best outcome of 0.89%, indicating a cautious approach from investors wary of potential volatility in the corporate sector post-election. Meanwhile, European Corporate Bonds experience lower returns, ranging from 0.15% to 0.09%, highlighting their sensitivity to political changes and regulatory concerns that can impact corporate profitability. Lastly, while US Treasury Bonds provide stable returns with a best outcome of 0.70%, their low-risk nature ensures capital preservation for conservative investors, even if they do not lead in performance.

3)  Drill Down by US Equity Sector

Figure 7: Summary of Impacts (%MTM) following the 100 days after the election by US equity sector for the Predicted Winner Scenario.

This graph illustrates the diverse performance of US equity sectors in response to the "Predicted Winner" scenario, emphasizing the importance of sector allocation and market sentiment in shaping investment strategies. In this scenario, the Information Technology sector emerges as the best performer, achieving significant positive returns probably due to increased investor confidence and stability following predictable election outcomes. Companies within this sector are likely to experience heightened demand for their products and services, making them attractive investments in a favorable market environment. The Financials sector shows moderate performance, benefiting from regulatory stability and potential growth in lending and investment opportunities, although returns may be tempered by broader economic factors. Similarly, the Healthcare sector typically exhibits moderate performance; while it is often viewed as a defensive investment that provides stability in uncertain conditions, a favorable political environment can unlock its growth potential, leading to positive returns.

Upset Victory: Heightened Volatility and Uncertainty

1)  Analysis by Portfolio

Figure 8: Summary of Impacts (%MTM) following the 100-day after the election for Selected Hypothetical Portfolios for the Upset Victory Scenario

In this scenario, the Global Equity Fund demonstrates pronounced volatility, with performance ranging from -10.21% to 1.96%. This wide range underscores the market's sensitivity to political uncertainty, where investor sentiment can swing dramatically based on election outcomes. Conversely, the EU Equity Fund emerges as a beacon of stability and potential growth, with a positive range of 2.31% to 2.89%. This suggests that European equities may be perceived as safer or more favorable in the wake of unexpected results, attracting investment amidst broader market turmoil.

2)   Drill down by Fixed Income Instrument Type

Figure 9: Summary of Impacts (%MTM) following the 100-day after the election by Instrument Type for the Upset Victory Scenario

The bond markets react sharply to the Upset Victory scenario, illustrating the interconnectedness of political events and financial instruments. US Treasury Bonds generally experience negative outcomes, indicating a flight away from safe-haven assets when unexpected results occur, as investors reassess risk. In contrast, European Government Bonds benefit from this volatility, showing significant positive changes. This suggests that investors may seek refuge in European bonds, anticipating that political stability in Europe could be a counterbalance to U.S. uncertainties. European Corporate Bonds also reflect slight gains, indicating that regional dynamics can create opportunities even in turbulent times.

3) Drill Down by US Equity Sector

Figure 10: Summary of Impacts (%MTM) following the 100 days after the election by US equity sector for the Upset Victory Scenario.

In the Upset Victory scenario, sector responses vary significantly, highlighting the complexities of market reactions to unexpected election results. The Technology sector initially faces negative impacts due to regulatory uncertainties but may rebound as policies stabilize. Conversely, the Financials sector remains a stable performer, benefiting from diversified portfolios and potential infrastructure spending. The Energy sector stands out with strong positive outcomes, driven by optimism about increased government investment in energy infrastructure and renewable resources. Meanwhile, the Healthcare sector exhibits slight positive trends, reflecting its defensive nature and resilience amidst political turbulence. Together, these dynamics showcase how different sectors navigate the volatility created by unexpected electoral outcomes.

Tightly Contested Race: Caution and Mixed Outcomes

1) Analysis by portfolio

Figure 11: Summary of Impacts (%MTM) following the 100-day after the election for a Selected Hypothetical Portfolios for the Tightly Contested Race Scenario

The graph illustrates a comparative analysis of fund performance under the "Tightly Contested Race" election scenario, highlighting the best and worst outcomes for various investment portfolios. The Global Equity Fund exhibits significant volatility, with returns ranging from -4.01% to 5.56%. This fluctuation likely reflects the market's sensitivity to political uncertainty, as investor sentiment shifts dramatically based on election results. In contrast, the US Equity Fund shows a performance range of -4.01% to 2.58%, indicating moderate resilience amidst uncertainty, yet limited growth potential due to concerns over policy changes. The EU Equity Fund, however, stands out for its stability, achieving returns between 0.65% and 3.90%. This suggests that European equities are perceived as safer investments during turbulent times, attracting capital despite broader market challenges. Meanwhile, the Global Bond Fund offers relatively stable returns, with a modest decline of -0.55% in worst-case scenarios and a slight increase of +0.23% in more favorable conditions, appealing to risk-averse investors seeking safety and predictability.

2)  Drill down by Fixed Income Instrument Type

Figure 12: Summary of Impacts (%MTM) following the 100-day after the election by Instrument Type for the Tightly Contested Race Scenario

In the Tightly Contested Race scenario, the results reveal a mixed performance across various bond types, reflecting the anxiety surrounding potential policy changes and regulatory adjustments following a closely fought election. US Treasury Bonds show a best-case average return of 0.31% but a worst-case decline of -0.63%, indicating some investor confidence amidst significant concerns about the political landscape. Similarly, US Treasury Notes and STRIPs exhibit negative worst-case outcomes, suggesting that even traditionally safe assets are impacted by uncertainty. European Government Bonds stand out with a best-case return of 0.38%, yet their worst-case scenario shows a stark decline of -1.59%, highlighting volatility in European markets amidst election outcomes. Corporate bonds display a similar trend, with modest positive returns in the best-case scenarios but negative outcomes in the worst-case scenarios, reflecting cautious investor sentiment.

3)  Drill Down by US Equity Sector

Figure 13: Summary of Impacts (%MTM) following the 100 days after the election by US equity sector for the Tightly Contested Race Scenario.

In the Tightly Contested Race scenario, sector performance varies significantly, particularly within Technology, Financials, Healthcare, and Energy. The Financials sector emerges as the top performer, with a best-case return of 3.53% and a worst-case outcome of 1.11%, indicating strong investor confidence despite the surrounding uncertainty. In contrast, the Technology sector shows a best-case return of 0.37% and a worst-case decline of -0.31%, reflecting a more cautious investor sentiment as market participants weigh potential regulatory impacts. The Healthcare sector demonstrates moderate stability, with a best-case return of 1.20% and a worst-case decline of -0.47%, suggesting that it remains a relatively “safe haven” during turbulent times. Lastly, the Energy sector presents a unique scenario, achieving a best-case return of 0.46% and a positive worst-case outcome of 0.27%, indicating resilience and a steady demand for energy resources even amidst political uncertainty. Overall, these results highlight how different sectors react to the volatility of a closely contested election, with Financials leading while Technology faces more challenges.

Conclusion

Navigating the complexities of election years requires asset managers to be proactive and adaptable. By leveraging tools like the S&P Global Market Intelligence Buy-Side Risk solution, managers can conduct comprehensive scenario analyses to anticipate how different election outcomes might impact portfolios. This involves simulating various scenarios—such as predicted wins, unexpected outcomes, and tightly contested races—to understand potential market reactions and sector-specific impacts.

The use of inference models and stress testing allows managers to convert economic indicators into actionable market risk factors, providing a robust framework for risk assessment and management. By identifying vulnerabilities and implementing hedging strategies, asset managers can protect their investments from adverse effects and capitalize on opportunities.

Ultimately, a strategic approach to election-related market dynamics ensures that portfolios are well-positioned to withstand volatility and benefit from favorable conditions. By staying informed and agile, investors can confidently navigate the uncertainties of election cycles, enhancing their ability to manage risks and achieve long-term success.

About Buy Side Risk Solution

The S&P Global Market Intelligence Buy Side Risk Solution empowers risk teams with agile, cloud-native analytics that scale with your firm. It supports pre-trade risk assessment, investment decision-making, and enhances risk architecture. This next-generation portfolio risk management platform covers market, liquidity, and climate risks, offering comprehensive asset class coverage and unrivaled data sources.

Key features include the ability to calculate Value at Risk (VaR) and expected shortfall using various methodologies, compliance with regulatory risk measures, and decision support tools like stress testing and pre-trade scenarios. Its powerful risk modeling capabilities allow for full revaluation of complex products, flexible aggregation, and customizable risk engines, ensuring a complete view of portfolio risk factors.

^{[1] Azzimonti, M. (June 2024). "Economic Policy Uncertainty in Election Years." Federal Reserve Bank of Richmond Economic Brief, No. 24-20.
[2] The 2000 election is often considered an upset victory, particularly because of the unexpected outcome in the Electoral College despite Al Gore winning the popular vote. Many pre-election polls suggested that Gore would prevail, but George W. Bush ultimately secured the presidency after a contentious Supreme Court decision regarding the Florida vote recount. This divergence between expectations and the final result, combined with the dramatic circumstances surrounding the election, contributes to its classification as an upset victory.
[3] U.S. Investment Professionals Bullish on Market Performance Post-Election (cfainstitute.org)}