How Will The US Election Affect The Markets?

BY Chris Andreou

|October 6, 2020

The US presidential election is just around the corner.

With the recent onslaught of covid-19 related updates, it’s almost been overlooked in the daily news cycle. But that won’t diminish its impact on the markets once the craziest political spectacle on earth finally gets underway.

Here’s what to pay attention to in this election cycle.

Policy & Taxes

The presidential candidates have rolled out a list of policies which will affect the markets. Many of these policies will impact the dollar, such as each candidate’s respective approach to US-China relations, as well as their stances on trade agreements with neighbouring countries such as Mexico and Canada.

During the height of the recent standoff between the US and China, for example, gold made significant gains as uncertainty over currency fluctuations sent investors looking for safer bets.

As far as stocks are concerned, nothing is more important than tax policy. Researchers who have analysed the effect of elections on stock markets have repeatedly shown that tax policy was the number one driver of stock movement during election cycles.

Pay particular attention to policies surrounding corporate tax rates for the broadest reading of market impact. Lower corporate taxes tend to lead to higher company valuations.

Other policies will have a significant impact on related sectors. For example, energy policy will likely play a determining role in the price of energy stocks like Chevron (CVX) or Exxon Mobil (XOM).

Increased Short-Term Risk

The uncertainty that surrounds most US presidential elections also implies greater risk when trading certain assets. With investors seeking a balancing act between investing into the likely outcome while also trying to brace for a shock result, markets tend to see fluctuations in currency and stock prices as momentum shifts one way or another.

US dollar pairs such as the EURUSD, USDJPY and GBPUSD are especially vulnerable to fluctuations, as are US stocks and indices such as the Dow Jones and Nasdaq.

It’s Not Only About The President

In market-related election coverage, there can often be too much focus on the president instead of which party takes control of the two chambers, the Senate and the House.

These bodies have immense power to pass or block important legislation. If, for example, the Democrats win the presidency but lose the congress and the senate, that could lead to an impasse and effective government may not be possible. This could lead investors away from US investments into foreign assets with more certain futures.

The Presidential Cycle Matters Too

Extensive research has shown that markets tend to move based on how far along a presidential cycle we are. This theory has suggested that the markets tend to be stronger in the last two years of a presidential term, while markets tend to underperform during the first two years of the term.

This may be because as the next election nears, presidents tend to enact legislation favourable to the economy (and the markets) in order to “juice” or boost their image before re-election time.

In the run-up to this November’s election, look out for economy-boosting legislation that may seek to influence US dollar and stock market price.

Open an FX trading account with TIOmarkets to trade the US elections

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Chris Andreou

Experienced independent trader

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Trade responsibly: CFDs are complex instruments and come with a high risk of losing all your invested capital due to leverage.