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📝S&P 500 Index Tends to Underperform Early On Election Year: Barclays Strategy

Figure 23 shows the typical evolution of the S&P 1y before to 3m after US presidential elections from 1932 to 2020 (twenty-four election cycles). A number of interesting patterns emerge. For instance, S&P tends to experience more muted returns leading up to the election. However, while the gap is generally narrow (on average -1.8%) throughout the year, the underperformance becomes more noticeable 8m to 5m prior to elections (corresponding to 2Q), with the S&P trailing as much as 5.2% (importantly, we use median levels to avoid a disproportionate impact from the 2008/2020 election cycles). Interestingly, this contradicts the fact that interest around elections, as well as the event risk premium priced by S&P options markets , peaks just shortly before the election.

True, the distribution of returns is quite wide, especially around the 8m to 5m period prior to elections. However, it is interesting that the same pattern is visible for the three election years that coincided with the start of a cutting cycle (1960/1980/1984) where the S&P experienced heavy losses during the first half of the year, dropping as much as 10%, on average, from the start of the year.

-Barclays Strategy



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