How is the outcome of the elections likely to influence the markets?

The United States presidential election will be held on November 3, 2020. When it comes to electing the new US President, the whole world looks forward to the outcome of the event. In fact, the results from the elections are extremely important for the future directions of the financial markets. Therefore, investors and traders should definitely follow the event and position themselves properly ahead of the great movements the market would present following the outcome of the elections. Joe Biden (the Democratic candidate) would make an attempt to take the ruling President Trump’s position and become the new President of the United States of America. In fact, the pre-election polls have been showing lately that Biden is leading the battle ahead of the election. Yet, nothing would be certain till the very end. Going back to 2016 when Donald Trump (Republican party) won the election, quite a lot of speculation was going around and it was widely expected that Trump would have a hard time winning the election. Well, he succeeded and surprised a big portion of the population in the US and around the world.

When it comes to the market, it was widely expected that in case Trump won the elections in 2016, the stock market would make a significant drop as his decisions are very unpredictable and many market participants were expecting the stock market to react negatively on Trump winning the elections. Many people were expecting the leading US indices to drop 30-40% in a short while in case Trump wins. Well, after his victory the market had been in the longest bullish rally in the history of financial markets. Ever since the end of 2016, the market has been extremely bullish after Trump won the Presidential election and his policies have been very welcome for the markets. Yes, many would argue that some of his decisions might be ethically incorrect and he has taken some very unpredictable and most likely inappropriate decisions, and that’s a fact. However, the numbers show that during his Presidency, the economy has kept on rising and delivering very solid results.

By looking at the stock market, we could easily see the massive uptrend that has been going since he was elected President. The biggest index in the US S&P 500 was trading at $2100 on the day of the elections (November 8, 2016) and had risen up to $3,385 in February just before the coronavirus crisis started that led to a massive correction on the stock market. Yet, before that the biggest index in the US representing the performance of the 500 biggest American companies had gone up 61% in 3 years after he was elected. Since February, the market has again been in a massive uptrend that has sent the S&P 500 towards the current highs at $3483. Therefore, the overall percentage gain since he was elected is 65% so far.

Chart: S&P 500

In other words, his economic policies, supporting the domestic producers, as well as lower interest rates and taxes have been among the main reasons for the huge success of the stock market ever since he was elected President of the United States. So, even though many people don’t really support his unpredictable decisions and speeches every now and then, the numbers don’t lie and could help him win more of the electors. As a matter of fact, Trump’s administration has almost reached the S&P return of Barrack Obama (71%), and has done better than Bill Clinton’s 65% return during their presidencies.

What do pre-election polls show?

In fact, since the pre-election polls are showing more support for the Democrats and Joe Biden for a President, some investors are currently betting on a Democratic sweep of the Congress and the White House. In case that happens, investors would anticipate a greater regulation for the financial services, healthcare and energy sectors in the economy. Moreover, the big tech companies could also be under pressure, based on the recent congressional report that accused them of market abuse.

In case the democrats win both the Congress and the White House that would increase the spending for infrastructure projects that would reward the construction, as well as the renewable energy sectors.

However, the increase in spending could easily lead to higher individual and corporate tax rates. We would like to remind our traders that Donald Trump cut the corporate tax rate very significantly in his presidency. In case the Democrats win and increase the corporate and individual tax rates that would be seen as negative for the markets.

Expectations & possible outcomes

In fact, the key variable for investors at the moment rests with divided vs. unified government. That’s what investors are currently looking for in order to take rational investments decisions and benefit from any potential movements on the market in a positive or negative direction. Therefore, whether the outcome would be for a divided or unified government is a better predictor of future policies than whether the Republican or Democratic party would gain control of the White House.

In case Biden wins, his progressive policy is expected to bring more government involvement in climate-change and healthcare that could significantly affect the macro and equity sectors in the future. Moreover, a Democratic win could bring more economic stimulus policies, which are expected to have a meaningful multiplier for further economic growth. Moreover, Biden is expected to ease the trade tensions between the US and China, which would improve the political tension between the two biggest economies in the world.

In case we see the Republicans win both Senate and the House, we could expect Trump to continue his aggressive anti-China stance. Moreover, a Republican sweep in both Senate and the House could mean more tax cuts and an early extension of Donald Trump’s tax provisions that result in higher deficits. In fact, such a fiscal boost would likely lead to a strengthening US dollar, while bond prices would be expected to drop, pushing up the interest rates and yields. In terms of individual sectors and equities, the US energy, telecoms and asset managers are expected to benefit from the continued deregulation.

Conclusion

We would be looking very closing at the upcoming elections on the 3rd of November as they would be extremely important for the future direction of the markets. Even though Biden is leading the battle at the moment, we wouldn’t be rushing into buying into those expectations yet. Nothing is certain till the very last day. We have seen the massive stock market appreciation after Trump’s victory 4 years ago. His economic policies, lower interest and tax rates and other stimulus have been very useful for the economy and the markets. We believe in case Trump wins again the market would see this as positive news. Joe Biden’s policies could bring some mixed expectations for the future direction of the market, due to a potential increase in corporate and individual tax rates and more regulation across key sectors in the economy. So, market participants would be confused in case of a Biden win.

Moreover, we should take into account the second wave of the coronavirus that is expected to bring more fear and uncertainty all across the world, which by itself could lead to negativity among investors that would drag stocks and indices down again after the massive rally over the past 7 months. Yet, we are also looking at the current earnings season where all publicly traded companies are announcing their Q3 financial reports that are currently driving the market higher and we would be looking forward to the upcoming reports by the middle of November. The earnings results could drive the market higher in the short-term and then the US elections as well as the coronavirus’ development would be the next big factors that would have an impact on the market for the middle to longer-term.

Sincerely,

This image has an empty alt attribute; its file name is logo.svg

Add a comment