Volatility, Elections and the TSP

Elections in November and underlying social unrest that is already upon us may lead to significant volatility in the TSP’s stock funds. How will you react?

October is the most volatile month of the year in the stocks. Why that happens is a matter of speculation. Regardless of the reason, stock prices during October are more volatile generally. 2020 has already been a volatile year and the potential controversy surrounding our national elections may result in even higher highs and lower lows this October.

Being prepared for a wild ride in stock prices is usually the safest approach. If it turns out that this October is not as volatile as usual, that would be a welcome surprise. The safest approach for your future retirement may depend on a person’s financial situation and emotional temperament.

2020 has already been a rough year. The COVID-19 pandemic has disrupted lives, careers, and the financial stability of many Americans. People are on edge. On top of that, many cities are experiencing riots, destruction of property, injuries, and a few deaths as protests turn into riots.

With this background, and the hostility and animosity that now exists between elected officials of different parties, this year’s national elections contain enough uncertainty and anger to lead to even greater social and political unrest.

Several possible triggers already exist that could set off more anger, destruction and social upheaval.

When Will the Election Be Over?

There is now rampant speculation that the results of the election will not be decided on November 3rd. The parties and their supporters are lining up hordes of lawyers, presumably to try and obtain an advantage for the party that has hired them.

Legal challenges are likely to abound. If the election is close, there may not be a clear winner until days or weeks after the election has been held.

The pandemic is already leading to a large increase in mail-in votes instead of in-person voting. Some states may not be able to handle the increase. Some states may handle the increase in mail-in votes but it may take them days or weeks to count the ballots and resolve the legal challenges. There is also the possibility of significant doubt by the losing party over the validity of the election as a result of the large increase in ballots being mailed and the possibility of increased fraud.

How Will the Stock Market React?

The stock market does not respond well to significant disruption and violence. If the election is being contested in the courts and there is no clear winner, it is easy to envision the current violence in the streets continuing and expanding with new issues feeding the flames.

If that happens, the stock market, and the Thrift Savings Plan funds investing in stocks, may take a big hit—at least for a short time. If that happens, a number of investors will—based on past experience during disruptive events—sell their stock funds in the heat of the moment.

Dealing With Volatility in Stocks

No one knows, of course, but a disruptive event could well be an opportunity in disguise for some investors.

The C Fund hit a low of $32.85 in late March. By the end of August, it was up about 57% from its March low. This stock fund has retreated again in September but, at the time of this writing, the fund is still up about 3.45% for the year.

Some TSP investors sold their shares in the C Fund at or near the low point. This decision “locked-in” these losses. Some readers have submitted comments that they took extra money they had socked away and put it into the C Fund or other stock funds in March. For those that did this, they have seen a financial reward.

Key Drivers to Disruption

In the election of 2000, a decision was sought from the U.S. Supreme Court to determine the outcome of the election. Between election day and December 15, 2000, the stock market dropped about 8%. That dispute centered on counting of votes in Florida.

This year’s election has the potential to be more volatile and more widely challenged than was the case in 2000. Here are several possible scenarios:

  • Election results are delayed for days, weeks or months.
  • One or both candidates contend the vote-counting process or the certified results are based on fraud or other illegal activity.
  • Political groups or sympathizers engage in violent confrontations.
  • The military has to restore order or protect the White House as a result of violence in the streets.
  • Neither candidate will concede as legal disputes drag through the courts.

What Will the Market Do?

If any of these events should occur, how will the stock market react?

The market could fall dramatically as Americans wonder how the disputes will be resolved and whether any reasonable solution will contain the violence.

Of course, it is also very possible none of these possible scenarios will occur. The election may go smoothly, there will be a clear winner and we know who will occupy the White House on Inauguration Day within a day after the election. The stock market may go up as a result of a smooth election while Americans celebrate the strength of the Republic and our system for selecting elected officials.

Have a Plan in Place

These scenarios above are probably the worst-case scenarios. Perhaps the election will have a big winner with a sufficient margin of victory that any disputes will only be a whimper and a footnote for historians.

TSP investors should be thinking ahead and should do so right away. Is the balance of your TSP portfolio adjusted in a way that you are comfortable with it? If the stock market drops dramatically in a short time, are you prepared to hang on and see how it turns out or will you decide to sell your stock funds if there is a big drop?

If you think there is a likelihood, based on past experience, that you will react strongly to the emotional strain of watching your future retirement funds dwindle, should you sell some of your stock funds now while prices are still favorable and may drop in the near future? In other words, should you rebalance your portfolio to be less reliant on stocks? Do you already have your investments in place to your satisfaction?

It is better to think through how you will react before events occur. No doubt, the uncertainty may provide increased business for financial advisors helping their clients deal with short-term swings in the market.

While we cannot reliably predict the future, the most likely result is that the election will end peacefully and election winners will take their offices as usually happens. There will probably short-term swings in the stock market. If there is disruption, the market will adjust and investors will be rewarded when normality resumes.

In other words, do not panic, readers should consider how they will react during uncertain times, and invest according to their ability to deal with the inevitable risks of investing.

We wish our readers the best of luck in making decisions that will best secure their financial future.

About the Author

Ralph Smith has several decades of experience working with federal human resources issues. He has written extensively on a full range of human resources topics in books and newsletters and is a co-founder of two companies and several newsletters on federal human resources. Follow Ralph on Twitter: @RalphSmith47