US presidential election: what does it mean for markets?

We look at the US presidential election, and what it will mean for financial markets.

Election a key moment for markets

The US presidential election is one of the most closely watched events in the calendar. Although it only occurs every four years, most of the preceding year is taken up with choosing candidates and deciding policy platforms, while the immediate aftermath is always a period of interest as pundits speculate about what the new (or not so new) occupant of the most important office in the world will do.

This time around, the election takes place in a febrile atmosphere. US politics were already sharply divided at the beginning of 2020, as US President Donald Trump’s ‘Keep America Great’ approach contrasted with Joe Biden’s more conventional policy platform, as the former vice president campaigned in a vein similar to that of his predecessors. But the Covid-19 pandemic provided another, entirely unexpected, element to contend with.

Global pandemic transforms the race

The economic shock and market dislocation prompted by the pandemic upended expectations for the election. Donald Trump’s most powerful card, the economy, suddenly suffered a severe blow, and only quick Federal Reserve (Fed) and government fiscal stimulus helped to stave off disaster. While a recovery is arguably under way, there is still a long way to go, and more government support will be needed. Whoever wins the election will need to embark on more support programmes for workers and affected industries, in a bid to steer the US economy through to a safe harbour when a vaccine is introduced.

From a relatively tight race earlier in the year, Joe Biden has managed to establish a noticeable lead over the incumbent, Donald Trump. Despite some recovery in his polling, Mr Trump continues to trail his opponent, with a bigger mountain to climb in terms of winning sufficient votes in the Electoral College. It is still not certain who will win, but Mr Biden appears to be doing better in key battleground states compared to Hilary Clinton in 2016.

Will this be a re-run of 2016?

The last presidential election was one of the most surprising in recent memory. Coming in a year that saw an oil price slump and then the Brexit referendum, the victory of Donald Trump over a Democrat opponent that had seemed a dead cert to win came as a shock to global markets.

On the night of the result, markets saw substantial volatility, with Dow futures and the dollar index both dropping sharply in the wake of the news that Donald Trump was victorious. Markets and investors had been caught napping by the result, in a similar way to the Brexit referendum. But contrary to expectations, the election of Mr Trump did not provoke a new bear market in stocks. Indeed, the reverse was true. Investors piled back into US equities, sending them to record highs, a fact trumpeted at repeated intervals by the administration.

This time around, investors are more prepared, at least psychologically, for volatility. Arguably, Mr Biden would represent a return to the Obama years, with a greater focus on social welfare and potentially higher taxes, in order to help pay for the recovery programmes that are badly needed. In this sense he may be considered the ‘main street’ candidate. Conversely, Mr Trump is still seen as the business choice, representing reduced regulation and tax cuts designed to spur the US economy forward.

International outlook key

A Biden win would likely see a more conciliatory approach towards America’s foreign partners and opponents. Mr Trump was keen to use American economic leverage to extract concessions from trading partners, regardless of how close these were to the US in strategic terms. Of course, there was the trade war with China, which rumbles on despite expectations of a deal, and a second Trump term would likely see the president push forward with a more combative approach with regard to trading partners like China, the European Union (EU), Canada and Mexico.

By contrast, Mr Biden would likely seek accommodation, aiming to rebuild relationships in order to provide a more congenial outlook for a global economic recovery. Businesses and markets may ultimately prefer a Democratic administration that repairs the global free trade outlook and thus provides a boost for the US economy.

What about Brexit?

As the UK looks to exit its Brexit transition period at the end of the year, the occupant of 1600 Pennsylvania Avenue will be key. Trump is a fan of Brexit, a fact exploited by Boris Johnson and in some ways bemoaned by Theresa May. Meanwhile, Joe Biden has already signalled that the UK must look to preserve peace in Northern Ireland as a prerequisite for any US deal.

While London might hope in some ways for a Trump win, the current president is not shy about strong-arming allies into deals favourable to the US. A trade deal could be more likely under a Republican administration, but if the Democrats do well in Congress a deal may struggle to make much headway.

Market impact

US elections always produce much heat, but little light, around the key question of ‘what markets will do’. In a sense, the person who occupies the Oval Office probably only has a marginal impact on overall market direction, a fact that the current incumbent would probably disagree with in his usual vehement fashion. We can be certain about one thing – a Republican win would mean more market tweets, while Mr Biden might be tempted to take a calmer course, keeping his views to himself.

Much was made of the ‘Trump bounce’ in stocks following the election. Perhaps it contained a grain of truth. But overall what we saw was a US rally built on strong fundamentals, and inflows into key sectors that had been unpopular for the months preceding the election. Compared to a UK besieged by Brexit and a eurozone with sluggish growth, the US economy was going strongly, and investors could not resist the prospect of higher returns from this economy.

This time around, perhaps, the picture is less clear. The US has, in some ways, fumbled its response to Covid-19, and the impending vote has essentially torpedoed any chance of a big new fiscal response to support the economy. But the UK, Europe and Asia are also suffering. The US has the potential to grow, and do so strongly, supported by an activist Fed and by the prospect of government stimulus regardless of who wins the election.

Be prepared

I round off with my usual comment – whatever happens, investors and traders need to be prepared. Have a plan in place, using stop losses and defined risk levels. If the lead up to the election, or the night itself, or the weeks afterwards, are volatile, then remember to either widen out stops and reduce position sizes, or step aside entirely to allow things to settle down.

2020 has been a rollercoaster ride already. The prospect of a tightly contested election, one that may lead to an uncertain result that is fought out in the courts in a manner reminiscent of, but worse than, 2000, may make markets more volatile for longer. Make sure you have a plan, and that you follow it. This is going to be an exciting time, but a volatile one.

You can listen to more episode of IG Trading the Markets on Apple, Google and Spotify.

IG Trading the Markets

https://www.ig.com/uk/trading-podcasts

Apple

https://podcasts.apple.com/gb/podcast/ig-trading-the-markets/id1481590708

Google

https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5ibHVicnJ5LmNvbS9mZWVkcy9pZ3RyYWRpbmd0aGVtYXJrZXRzLnhtbA

Spotify

https://open.spotify.com/show/7KvbnNEPLMgawdOQTfh5JW?si=AWlCWIa6QkyhfxDcUfq2yQ


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