Midterm Elections: What History Tells Us About Volatility

Months ahead of 2018 midterm elections, fear ran rampant of a changing of the guard.

If the Republicans retain leadership, we’re greatly optimistic we could see 35,000 on the Dow Jones Industrials, argued some. In fact, some argue that tax reform is likely to leave many Republicans relatively unscathed in 2018, and perhaps put them on solid ground by 2020, too.

Especially if tax reform fuels further economic boom…

Others warned of a “bloodbath” for Republicans.

For example, Politico suggested for example that the midterms could be “the worst” in history for them. The Hill predicted that November midterm elections are the Democrats’ “best chance in years to win back House.”

The Washington Post said the White House is “poorly positioned to handle the tough 2018 political landscape,” adding, “The president has been informed by aides and friends that if he loses the House in 2018, not only would Democrats almost certainly begin impeachment proceedings against him, but his entire legislative agenda would be imperiled, making any 2020 reelection bid far more challenging.”

But let’s not get ahead of ourselves. There are never any election certainties.

Actually, I take that back.  There is one certainty.  Volatility is likely to move higher. 

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As a matter of fact, history tells us that.

- Ahead of the midterm elections in 1990, the Volatility Index (VIX) jumped from 16 to 36

- Ahead of the midterm elections in 1994, the VIX jumped from 11 to 18

- Ahead of the midterm elections in 1998, the VIX jumped from 16 to 45

- Ahead of the midterm elections in 2006 and 2010, the VIX fell

- Ahead of the midterm elections in 2014, the VIX jumped from 12 to 40

So, as we can clearly see midterms can create a volatile mess.  So how have investors traded volatility ahead of key election dates?

Some use the following:

- Velocity Shares Daily 2x VIX Short-Term ETN (TVIX)

- iPath S&P 500 VIX Short-Term Futures (VXX)

- ProShares Ultra VIX Short-Term Futures (UVXY)

While VIX futures offer the purest exposure to volatility’s ups and downs, volatility funds attract volume because they’re far more easily accessed through equity accounts.

And while you won’t find a perfect correlation between the VIX and the above-mentioned trades, they do offer opportunity as a protective bet against a market crash. 

It’s just another strategy to keep in mind, as elections near.

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