USA Elections: A Classic Market Rhetoric?

Oct-31-2020Blog by – Mr. Keval Lakhani (Chartered Accountant - Research)Read Time: 3 Min.Word Count: 749
121USA Elections: A Classic Market Rhetoric?

The outcome of the USA elections is merely 2 weeks away, but just as the year 2020, the election built up has also seen many twists. At the start of the year, no one could have imagined the magnitude of the pandemic, nor would have imagined Joe Biden leading Donald Trump in the National polls for the mighty presidential election. While Donald Trump is popular with Corporations & Rural audience, Joe Biden is extremely popular with Black voters, Latinos and the young audience. 

USA elections tend to make noise across the world as it is touted as the most crucial elections for its implications on the economical activities, immigration, geo political issues and certainly the financial markets.  This is one political event which is believed to leave its mark on almost all asset classes from commodities, currencies, bonds as well as equity. 

Large numbers of investors are already busy in determining the outcome of the November 3 Presidential elections.  It is believed that the election in the post pandemic world is likely to see emotions like never before.

While there is always a buzz around elections, be it the USA elections or the Indian elections, one must think whether such events tend to have a longer term impact on the stock markets or does it only lead to short term volatility? 

Let’s have a look at how the stock markets have fared in the past in perspective of the USA elections:

Jogging our Memories back to 2016, most analysts back then had built in a case that a victory for Donald Trump will bring in a lot economic uncertainty and policy paralysis , but the stock markets have shown a contrarian trend and have been on the way up since then, proving most financial analysts wrong .

Since the Indian stock markets are a part of the global financial system, they initially tend to have a linkage with the outcome of the US elections as summarized below. Although the extent of the fall or rise could vary. 

In 2012, Barack Obama went on to win a second term that saw the S&P 500 loose 3.78% in the following week which also led to a fall in the Indian equities. However, the Indian equities fall was relatively shallow when they lost 1.05%.  Post this fall, the Indian markets saw resurgence and rose by 3.56% in the month that followed.

The markets in 2008 were in a firm bear grip which saw the S&P 500 drop by a massive 10%, following suit, Indian markets fell 7%. The drop was witnessed in the week followed by the elections. 

Some of the possible Outcomes:

  1. Donald Trump is re-elected, but the Congress House is divided between the Democrats and the Republicans.  In such a scenario it would be important to see the stance on immigration and trade talks with China. 

  1. A Joe Biden win, supported by a Democratic sweep in the house would mean a drastic change in economic &social stance of the USA.  They have always had more focus on Infrastructure, renewable energy and healthcare. Implications on Taxation policies need to be watched closely.

3.   A Joe Biden win and a split Congress would again lead to a divided house and the ability to roll    out policies would be under a close watch 

4.  A remote scenario of contested (disputed) USA elections. Then the matter could go to the Supreme Court, which could lead to massive uncertainty.  In such a case, a lot would depend on how long the dispute lasts.  However, such a scenario is remote but 2020 has led us to a lot of surprises. 

Not Just the stock markets:

USA elections have an impact on the commodities as well currency markets.  Donald Trump in the past has been vocal about a strong dollar. The famous dollar strength is at risk if the Biden administration is voted to power.  It’s not just elections, but also trade between countries which determine the strength or weakness of its currency. 

     USA Elections: A classic Market Rhetoric?

       Financial markets are always buzzing with the elections as they need a topic to display as a reason for the volatility in the markets. Generally, such events lead to short term fluctuations, leaving the longer term structure of the markets to its own fundamentals and structural changes as evident from the outcome of the previous USA elections or will this USA election set a different benchmark for the global markets? 

Disclaimer:  Informative and Educational Purpose only.

Also Read: Key Benefits of Investing in the Stock Market

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