Opinion – Grain in Grain: How did the stock market behave in the last elections and what to expect now?

When evaluating the performance of the stock market in the past, we have to be very careful with comparisons. There are always many events that influence the market and occur at the same time. Therefore, isolating only one of them to draw comparisons carries the risk of disregarding another factor that was preponderant. Currently, there are two risk factors that cause uncertainty in the market. One of them is the presidential election and that’s what we’re going to talk about.

How do you think the market volatility is now in relation to the historical average of the last two decades? Would you say volatility is higher or lower than average?

Volatility is one of the risk measures used in the financial market. It depicts the dispersion of returns from their average.

This means that if the stock price is oscillating intensely up and down, the volatility is higher. The narrower the range of oscillation, the lower the risk, as the returns are closer to the average.

Another question to ask is: how did the market behave in the last five elections in the period from the beginning of the year to mid-September of the respective year? And from this moment until the end of the elections or until the end of the year?

The uncertainties that election years bring end up confusing investors about the real situation in the market.

When we experience an event, we tend to believe that it is more intense than in the past. The same effect occurs with temperature. When we experience cold days, we believe that the cold is now more intense than in the past.

Thus, most investors believe that volatility, or market risk, would now be higher than its historical average.

In fact, this is not true.

The chart below shows the evolution of market volatility over the last two decades.

Current market volatility is 18.4% per year. The historical average of volatility is 25.6% per year. Therefore, market volatility is lower than the past average.

Although we believe that political polarity is more intense today than in the last elections, the current market volatility is lower than that observed in the last five elections. The table below presents these results.

In addition to the volatility observed in the market exactly in the mid-September period of each election year, the table also presents the return of the Ibovespa.

The index return is divided into three parts. The first payback period runs from the beginning of the year to mid-September. The second period starts in mid-September until the end of the second round. Finally, the third period considers the return of the Ibovespa after the second round until the end of the year.

In 2022, Ibovespa’s return was 4.3%, until last Friday. Despite being a good result compared to what happens in the rest of the world, it is still an apathetic performance.

The third column of the table above shows that, except for the year 2014, the Ibovespa performance was also not good until mid-September of each election year.

However, except for 2014, the last three months of the year were good or at least positive.

As I mentioned at the beginning, the second risk that keeps investors awake at night must still be considered. This risk is high interest rates in the US that could cause global growth to slow down.

So I’m not saying we’re in the best time to buy stocks.

However, with the prospect of the end of the cycle of high interest rates in Brazil and the proximity of the end of the electoral risk, the Brazilian stock market should continue to perform better than the American market in the short term.

Michael Viriato is an investment advisor and founding partner of Investor’s House

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