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U.S. Elections: Charting Patterns in Market Volatility

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Us election volatility in markets

This Markets in a Minute Chart is available as a poster.

U.S. Elections: Charting Patterns in Market Volatility

Do elections influence market volatility?

Over 90 years of data shows that volatility jumps 30% in the five months leading up to an election. But while elections have historically stoked uncertainty in the market, in reality, the scale of their impact plays a relatively minor role.

This Markets in a Minute chart from New York Life Investments shows volatility trends surrounding elections over the last century, and how investors can best position themselves amid market turbulence.

Making Sense of Market Volatility

Volatility is when a security has sharp price movements in either direction. The market’s volatility is measured by the CBOE Volatility Index (VIX), also known as the ‘fear gauge’ for the market. The higher the VIX reading, the higher the volatility.

The five-year average VIX value is 15.8, with an an all-time low of 9.1 in November 2017, and reaching an all-time high of 82.7 in March 2020. Specifically, in the five months ahead of U.S. elections, the VIX tends to fall between 14 and 18.

MonthAverage Monthly VIX During U.S. Election Years Since 1928
July14.2
August15.0
September16.0
October17.4
November18.0
December14.7

Source: Eureka Report

After the dust settles from elections, market volatility reduces as investors gain more clarity on government direction.

In short, in the six months following an election, volatility tends to fall on a downward sloping trajectory.

Finding Opportunity Surrounding U.S. Elections

With volatility here to stay, investors can utilize a number of portfolio strategies prior to elections.

  1. Stay the course: The easiest thing investors can do is nothing. Ignoring irrational market activity and staying invested will help you keep your investment goals on track.
  2. Focus on value: Investors can focus on companies with sound balance sheets that return value back to shareholders, such as fixed-income investments or dividend-paying stocks. For instance, when concerns circled around increased taxes on investment income in 2012, no less than 1,100 companies issued a special dividend following the election.
  3. Bargain hunt: Overvalued stocks, or sectors in the policy spotlight, can temporarily dip amid market fear. For example, in 2016 the health care sector saw new policies that investors feared would have damaging effects. Ultimately, these concerns were overdone, and the sector rallied after the election.

Focusing on solid company fundamentals can offer windows of opportunity to investors who look past the short-term volatility.

Long-Term Areas to Focus On

Investors can look to structural factors, such as the economic environment, that have a more powerful impact on financial markets.

Interest rates, low bond yields and policy measures, among others, have a greater influence on market performance. Rather than paying attention to short-term volatility, investors can also focus on policy changes that have a lasting impact on the economy:

  1. Employment: Economic policies that help to promote workforce outcomes will have positive impacts on earnings growth, market performance, and investor portfolios.
  2. Taxes: Tax policies reallocate capital. Corporate tax cuts, for instance, can buoy markets and investor optimism.
  3. COVID-19 containment: The policies in place in response to COVID-19, such as the CARES Act, will have a marked impact on investor sentiment, company earnings, and ultimately economic resilience.

Looking past the election, and keeping an eye on policy shifts, could provide more insight into key forces shaping the future of the economy.

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Markets in a Minute

Four Types of ESG Strategies for Investors

Amid a global wave of green investment, this graphic breaks down four types of environmental, social, and governance (ESG) strategies.

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ESG Strategies

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Four Types of ESG Strategies for Investors

In recent years, sustainable investment strategies have shown a number of benefits for investors, from resilience in market downturns to share outperformance in the long-term.

Meanwhile, investor interest has skyrocketed—with environmental, social, and governance (ESG) indexes advancing 40% between 2019 and 2020 alone. Given the increased demand for green investments, investors have an ever-expanding list of options to choose from. But what ESG approach is the right fit for you?

To answer this question, this Markets in a Minute chart from New York Life Investments looks at the primary strategies used in ESG investing to help investors choose the approach that works best for their portfolio.

What Kind of Investor are You?

Broadly speaking, there are four main approaches to ESG investing: ESG integration, exclusionary investing, inclusionary investing, and impact investing.

1. ESG Integration

“I want to integrate ESG factors and traditional factors to assess the risk/reward profile of my investment.”

For example, using an ESG integration approach, a company’s water usage and toxic emissions would be assessed against financial factors to analyze any future risks or investment opportunities.

2. Exclusionary Investing

“I want to screen out controversial companies or sectors that do not meet my sustainability criteria.”

Using an exclusionary investing approach, an investor may screen out companies whose revenues are from tobacco, gambling, or fossil fuels.

Related ESG Terms:

  • Negative Screening
  • Negative Selection
  • Socially Responsible Investing (SRI)

3. Inclusionary Investing

“I want to seek out companies that are ranked highly in their sector based on sustainability criteria.”

With an inclusionary approach, a fund may include the leading companies in a sector, relative to their peers, such as the top performing tech companies in ESG.

Related ESG Terms:

  • Positive Screening
  • Positive Selection
  • Best-In-Class
  • Positive Tilt
  • Thematic Investing

4. Impact Investing

“I want to invest in companies that attempt to deliver a measurable social and/or environmental impact alongside financial returns.”

Lastly, impact investing approaches may focus specifically on renewable energy companies that have the intent to make a positive environmental impact.

Related ESG Terms:

  • Goal-Based Investing
  • Thematic Investing

ESG Investing Strategies, By Market

How does interest in ESG strategies vary according to geographical region? Overall, interest has increased across all regions globally (where data was available).

Interest in ESG By Market*20182020
India98%100%
Mainland China95%98%
UAE90%94%
MexicoN/A92%
France79%91%
Brazil82%90%
JapanN/A88%
Hong Kong, SAR China71%86%
South AfricaN/A83%
Germany64%81%
Singapore77%78%
United Kingdom51%77%
Canada49%68%
Australia49%65%
U.S.49%57%

*With interest in these strategies and already employing them
Source: CFA Institute (Dec, 2020)

At the top was India, where 100% of respondents expressed interest or were already using ESG strategies—up from 96% in 2018.

In fact, India developed National Voluntary Guidelines on Social, Environmental, and Economic Responsibilities of Business as far back as 2011. This was designed as a guideline for responsible business conduct, which later aligned to the UN Sustainable Development Goals in 2016.

Following closely behind were investors in China (98%) and UAE (94%).

By contrast, 57% of investors in the U.S. employed ESG strategies—the lowest among geographic regions. Despite this, in the last two years, this figure jumped 8%, and it may rise higher yet given U.S. president Joe Biden’s new climate priorities. Electric grid and clean energy, decarbonization, and electric vehicle incentives all fall under a massive $2 trillion infrastructure plan, which will likely have a significant impact on the dialogue surrounding ESG.

Going Green

As the global drive for ESG investment continues to rise, investors can harness a greater understanding of different ESG strategies to meet their personal objectives—whether it is risk/reward analysis, seeking out ESG top performers, or a measurable environmental impact.

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Markets in a Minute

Visualizing U.S. Stock Ownership Over Time (1965-2019)

The proportion of U.S. stock owned by foreigners has climbed to 40%, while U.S. stock ownership within taxable accounts has decreased.

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Stock Ownership

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U.S. Stock Ownership Over Time (1965-2019)

The U.S. stock market is the largest in the world, with total U.S. stock ownership amounting to almost $40 trillion in 2019. But who owns all these equities?

In this Markets in a Minute from New York Life Investments, we show the percentage of U.S. stock owned by various groups, and how the proportions have changed over time.

The Groups Who Own U.S. Stock

Based on calculations from the Tax Policy Center, here is the breakdown of U.S. stock ownership as of the year 2019.

CategoryShare of U.S. StockValue
Foreigners40%$16.0T
Retirement accounts30%$12.0T
Taxable accounts24%$9.5T
Non-profits5%$2.0T
Government1%$368B

Foreigners own the most U.S. stock. Their portion of ownership has grown rapidly, climbing from about 5% in 1965 to 40% in 2019. Foreign ownership exists in two forms: portfolio holdings and foreign direct investment. The former includes holdings with less than 10% of voting stock, while the latter refers to voting stock of 10% or more.

Why has foreign ownership increased so substantially? According to the Tax Policy Center, the growth appears unrelated to U.S. corporate tax rates. Instead, the increase is likely a result of globalization, as U.S. holdings of foreign stock climbed at a similar rate over the same timeframe.

Outside of foreigners, the largest domestic ownership groups are retirement accounts and taxable accounts. Stock ownership within taxable accounts has decreased by 56 percentage points since 1965. On the flip side, U.S. households have increased stock ownership within tax-advantaged retirement accounts, which now amounts to 30% of all U.S. stock holdings.

Retirement Accounts: A Closer Look

The proportion of U.S. stock held in defined benefit plans has decreased substantially since 1965.

U.S. Stock Ownership in Retirement Accounts

Note: life insurance separate accounts are reserves that fund annuities or life insurance policies.

This drop is partly due to the general decline in private employers offering defined benefit plans. Since these pension plans guarantee employees a set amount in retirement, they present a large long-term funding burden.

At the same time, there has been a corresponding increase in U.S. stock ownership within defined contribution plans and individual retirement accounts (IRAs). This reflects the fact that many investors are facing more responsibility, as they must take charge of their portfolios in order to build a sufficient nest egg for retirement.

The Future of U.S. Stock Ownership

Compared to 50 years ago, the composition of U.S. stock ownership today looks very different.

Foreign ownership has increased as globalization took hold, though it’s hard to say if this rise will continue. Since 2017, foreign direct investment in the U.S. has decreased. Not only that, China surpassed the U.S. as the top destination for foreign direct investment in 2020.

In addition, the shift to particular tax-advantaged retirement accounts has been a relatively recent one. For instance, IRAs didn’t exist before 1978, and defined contribution plans started becoming popular in 1980. As circumstances continue to evolve, how will U.S. stock ownership change over the next 50 years?

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