The US presidential election: What impact on financial markets?

Investors’ greatest fear going into this year’s American presidential election is to see the 2000 election’s scenario and its impact on the financial markets repeat itself. Back then, George W. Bush and Al Gore fought over votes in Florida, which ultimately led to an intervention of the United States Supreme Court; subsequently, the S&P 500 index had dropped 12%. As for this ongoing election, Trump has already announced that he would contest the results and castigated mail-in voting, which he says is rampant with fraud.

It is not unusual for the dollar to drop prior to US presidential elections, as it appears to be a safe investment in a period characterized by volatility and insecurity. This time is no exception: the dollar has weakened against the euro during the last weeks (despite fluctuations due to the second lockdown in Europe). 

Similarly, Bitcoin, Gold or Silver markets have been on the rise around election day. Furthermore, the S&P500 index has had a long-term positive trend, but the closer the election draws, the more the index tends to stagnate or decline. Indeed, even if there were moments of upturn between September and November, the weeks closer to the elections mainly consist of stagnation and drops, as investors hold their breath and their savings.

Figure 1 : evolution of the S&P 500 Index during the last 6 months (Bloomberg)

This trend can also be observed with the Dow Jones and Nasdaq indexes. Indeed, even if the financial markets are also impacted by the coronavirus pandemic, the impact of the US presidential election is still obvious: the closer the election gets, the greater the drops. 

Volatility has also worsened near the elections: the index is now at 32. Usually such a number would indicate an upcoming crash. The possible consequences on the markets of Wednesday’s outcome are all the more considerable as the two candidates have very different programs, and as no one would, after 2016, dare to predict the result of the election. Biden is admittedly the candidate most likely to win according to survey institutes, but betting odds are higher now for Trump than what they were in 2016, and he was then the one elected.

The election will determine many things, ranging from the dollar’s value to the evolution of shares, depending on whether a stimulus plan will be passed or not and on the industries favored by the next POTUS. Indeed, markets love stability and according to LPL Research, in the short term, Wall Street will do better if the ruling party remains in charge. This is indeed illustrated by the graphic bellow. 

Figure 2 : projection of the evolution of S&P 500 Performance (LPL Research, 10/20/20)

Moreover, some sectors will back Donald Trump even if his policies have unpredictable consequences on the international stage, as he promises to lower taxes and protects polluting industries, even rejecting the idea of man-made global warming. If the Republican candidate wins, the dollar would rise by 0.2% against the euro and 0.5% against the yuan in the next hours.

If J. Biden wins, it would be the opposite. Indeed, the Democrats’ candidate is planning on raising taxes (from 21% to 28% for the corporate income tax), spending and increasing regulation. His main idea to boost the economy is a massive stimulus plan.

Sectors such as oil, banking and infrastructure may be reluctant to these measures, all the more so as it would lead to a debt increase. However, it would also lead to an increase in the issuance of U.S. government bonds, and to the dollar dropping in the hours following the election (+0.45% for the euro and the renminbi), consequences which could attract investors to the USA. 

Indeed, the lower the dollar is, the more investors can buy shares and invest in the country. This Tuesday, November 3rd, the European, Asian and American markets were on the rise, as all bet on Biden’s victory and above all on his recovery plan. This Tuesday morning, the Dow Jones rose by 2.4%, the S&P 500 grew by 2.2% and finally the Nasdaq increased as well by 2.1%.

However, the consequences of the US election on financial markets will not be as important in the long run than what is commonly expected. Indeed, central banks have a lot of power on the rise or fall in financial markets. The graphic below shows it clearly.

Figure 3 : links between liquidity and the S&P 500 Index during the last 10 months (Bloomberg) 

If central banks do not have a structural solution to the uncertainty of markets nor to its volatility, they do have power on economic growth because the more liquidity is injected, the more reassured investors are. 

In fact, since the 2008 crisis, central banks administer the financial market. They are the ones enabling markets to function correctly. No matter who is elected or what decisions the new president may take, central banks will be there to balance and regulate the markets. 

Due to the US presidential election, there is a risk of market turbulence in the coming days and weeks. Whether it is a change in the industries and assets preferred by investors (from oil to U.S. government bonds, for example, if Biden is elected), in the exchange rates or in the evolution of stocks, the election will determine many things, even if in the long run, the decision of the American people will be balanced out by the central banks, and in particular the FED. 

However, according to investment funds such as IG Bank, volatility and uncertainty will not end with the appointment and inauguration ceremony of the new president, as the coronavirus pandemic rages on and continues to impact economies and financial markets worldwide.

Written by Mathilde Derambure

Edited by Claire Oaks

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