Goldman Sachs expects investor attention to increasingly shift toward the upcoming U.S. midterm elections, warning that political uncertainty could lead to higher volatility in the S&P 500 during the months ahead.
The bank said historical election cycles suggest that uncertainty surrounding economic policy tends to increase as the vote approaches, creating a less stable environment for equity markets.
Macro Risks Expected to Become More Influential
“In past cycles, economic policy uncertainty has usually risen in the August ahead of midterm elections and remained elevated in the subsequent few months,” strategists led by Ben Snider said in a note.
Goldman argued that this pattern supports maintaining exposure to equity index volatility.
While low correlations between individual stocks have helped suppress overall index volatility, the bank believes that effect will weaken as investors place greater emphasis on macroeconomic developments.
It expects “increased focus on macro issues including elections, geopolitics, and interest rate volatility” to become a more important driver of market performance once earnings season concludes.
History Points to Weak Pre-Election Returns
According to Goldman Sachs, the S&P 500 has typically struggled to generate meaningful gains in the period leading up to U.S. midterm elections.
Looking at the 13 election cycles since 1974, the index recorded a median return of 0% from early August through Election Day.
Performance has generally strengthened after the vote, with returns having “typically improved post-election,” producing a median gain of 6% over the following three months.
Investor Positioning Often Improves After the Vote
The bank added that mutual funds and overseas investors have historically reduced their exposure to U.S. equities before midterm elections before increasing allocations once political uncertainty subsides.
Goldman Sachs believes election-related developments, alongside geopolitical events and interest rate movements, are likely to play a larger role in determining equity market volatility over the remainder of the year.
Leave a Reply