If you’ve been regularly checking in with the news, or subscribe to investment theme email newsletters, you would know that there’s been an oversupply of election content. How will the election affect markets? Here are the top 3 stock picks ahead of the election, How will markets react to a Biden Presidency? The range is endless.
It has been a challenging year for stakeholders across the board. When Covid-19 first hit, even casual traders were scrambling to find ways to make sense of the havoc (and to salvage at least a portion of their money). Fast forward to November, and the world’s most highly anticipated election is approaching, also bringing with it the uncertainty in markets.
So today, to help you navigate through the noise all the way from Thailand-Bitesize Finance will take you through how to really navigate the financial markets following the US Presidential Election.
Disclaimer: This article should not be taken as investment advice-but merely a guidance on how markets could react if the election plays out in different ways.
Historical Data vs. The Present
As a rule of thumb, a Republican lead is supportive of stock prices as Republicans focus on enhancing company earnings and shareholder profits, while a Democrat lead would have the opposite impact on equity prices simply because they believe in the redistribution of wealth (and cutting taxes for the middle class).
Historically, markets perform better when the existing President remains in office for his second term as there are less uncertainties and a continuation of policies, not to mention-same party policies.
This time though, history might just go out the window. Against the backdrop is Covid-19, 2020’s black swan catastrophe and the US being the most infected country with 9.38 million cases in total and deaths exceeding 230,000. Numbers are still rising, although hospital rates are declining-the sentiment is not good and businesses are suffering.
At the bottom line, it’s a complex year and Trump is a complex, controversial President who won in 2016 despite the polls. Historical data may be irrelevant here.
Short term impact
First off, it’s not as easy as “if this person wins, it’s good for my portfolio”.
There are some near term factors that could add some volatility to the market. Firstly, it is highly likely that election results will be delayed, especially with 100 million early votes needing to be processed in correlation with physical votes on November 3rd (today).
A Conclusive outcome can take days or weeks sometimes, which causes volatility across global markets.
What more is that President Trump has repeatedly said he may not accept mail-in results, as they may be counterfeit. The President’s refusal to accept a potential defeat could also delay finalized results in the upcoming days. What could this lead to? Re-counting (which could actually extend to weeks), protests and people out on the streets.
Keep in mind that we are not saying this will happen, we are just playing out scenarios that could impact the market.
“Markets can have difficulty differentiating between the winning party’s campaign ambitions and the often different policy reality that comes with governing,” he said.
Morgan Stanley has classified assets into two groups: straightaways and detours.
Straightaways are markets in which the election outcome will have little or no impact on strategists’ current base cases. This includes
- Being short on US 30 year Treasuries
- Cautious on oil
- Bullish on dollar positions
Detours are markets that will likely be affected by the election outcome due to different paths policy could take. The best outcome for investors across the board is if there was a unified government, we’ll expand more on this later.
In the case of a blue sweep, looking at equities in overseas markets would likely see an immediate lift-according to Morgan Stanley. Meanwhile, if it’s a red redux, then telecom companies, US energies and even asset managers could see a surge due to continued deregulation from the government.
Let’s run through another scenario for markets. What about the debate of a united vs. divided government? Although market participants appear to be expecting a Blue Wave scenario, but a contested outcome also cannot be ruled out. What does this mean?
A Blue Wave scenario means that Joe Biden’s Democrat Party will win both the White House and Congress. This means tax cuts for the middle class but a tax increase for the wealthy and corporates. The opposite of this would be a Red Return which means Donald Trump’s Republican Party wins both the White House and Congress.
The most unfavorable outcome for markets would actually be a Divided Government. This would mean no party would emerge as the winner, leading to a political gridlock.
Historically, stocks have gained more when either party holds a simple majority in the senate-not more than 60 of the 100 seats. It doesn’t matter the party. Why? It’s really simple; less gridlock. However, according to analysis by Bank of America, read these numbers with a grain of salt, the dataset is limited and standard deviation is wide.
In the near term, regardless of who wins-the President will have to deal with the immediate short term economic recovery alongside managing the pandemic.
Either way, investment experts are saying there’s plenty of opportunities going into this election for investors.
Major policy shifts including further fiscal stimulus depend on which parts has majority control. Investors are eyeing the senate election closely, too.
Now, if you’re holding some big tech stocks, the likes of Facebook and Amazon-there’s likely bound to be some headwinds despite the outcome.
According to Reuters, some fund managers say they are “growing alarmed by what they see as a consensus in Washington to tighten regulations”, and prospects that another large stimulus bill would bolster a rotation out of tech and into other sectors.
Should Biden win as polls suggest, technology companies could face higher tax rates and tax-motivated selling as well as increased regulation, according to Reuters.
Apple, Microsoft, Amazon, Facebook & Google-parent Alphabet Inc now make up approximately 23% of the total weight of the S&P 500-and Washington has continuously called for tighter regulations on the monopoly.
Some investors pointed to recent hearings in Washington as a sign that increased regulations will come to the sector no matter who wins the election. With a Biden Presidency, all eyes will likely be on higher corporate taxes, vowing to increase the tax break from 21% to 28%.
The Bigger Picture
What else will come into play? Markets will also be keeping a close eye on other events this week. After the US Presidential Election today, there is the Fed Policy Decision on Thursday and the US Labor Market report due out on Friday. Both of these will impact market sentiment, although less than the US Presidential Election will.
Analysts aren’t expecting any big changes to Fed policy so soon after the election, but they’ll be waiting to see signals.
It is likely that clear cut results won’t be ready within a day, so it’s not a given that markets will receive a clear answer.
What are some experts saying?
“Democrats are known to raise taxes, increase regulations and increase deficit spending more so than Republicans,” said Joe Foster, Portfolio Manager-Gold strategy at VanEck. “But the pandemic, economic weakness and overall debt will be overwhelming regardless of who wins.”
“For emerging markets, the most important issue would be the potential change between US-China relations. The second issue is the election result’s impact on the dollar,” said David Semple,Portfolio Manager-Emerging Markets at VanEck.
“The question is, is the market right now looking at a Biden victory? And will it be disappointed if we don’t have that?” said Quincy Krosby – chief market strategist at Prudential Financial.
“We are expecting an increase in volatility coming in the next 72 hours. So, because of that people are looking at gold and silver as safe haven play,” said Phillip Streible-chief market strategist at Blue Line Futures.
“One thing we can count on is there’s going to be a level of uncertainty regardless of who wins. In our view, there’s no compelling evidence to make portfolio shifts based on your forecast of election outcome,” said David Booth, Founder of DImensional Fund Advsiors.
Market Sentiment tied to Covid-19
This is another added view for investors everywhere. A black swan event like the Covid-19 pandemic has certainly thrown 2020 out the window. This means that investors also have to factor this in when assessing market reaction to the election.
“I think people have to start switching their perspective and think and hope that we’re going to have a vaccine. Now, 2021, in terms of Covid, is going to be a much better situation,” said Peter Boockva-Chief Investment Officer at Bleakley Advisory Group.
Investors have to start thinking about what the world is going to look like post vaccine. Which sectors will benefit from this?
Nassim Taleb, investor and author of Black Swan said to CNBC that irrespective of who wins the US election, the economy will “not go back to pre-COVID, because we’ve had changes in the economic structure that are permanent.”
That means making permanent shifts to your portfolio because of a whole new economic landscape.
What about Thailand?
Markets are waiting patiently for the election outcome.
Thailand’s SET has taken a brutal hit from Covid-19, border closure and declining exports, and then now we’re seeing a drop in investor sentiment from the ongoing protests. We’ve seen the SET finish lower in three straight sessions, mainly with factors associating with the protests.
The results of the US Presidential Election will likely not create any impact on the SET beyond the short term, what’s putting pressure on our market is the political uncertainty-but we’re practically pros at this by now.
Looking ahead, Thailand should be more concerned with our own domestic growth, economic impact of border closure and growing political polarization as a threat to markets, more so than with the aftermath of the US Presidential Election.
If we look beyond the stock market though, and focus on potential foreign policy developments, it could be said that a Biden Presidency could mean renewed trade talks for Thailand. There is a likelier chance of resuming relations with a Democrat President, but then again, this is also dependent on whether Thailand is able to efficiently negotiate.
Historically, close elections typically see initial market weakness then a bounce back. While we can look to these historical trends for some insight, 2020 has also been far from typical. it is hard to invest according to politics, so they should ignore the political noise and determine if there is going to be a policy change before moving assets around.
The most important thing to keep in mind? Presidential elections will continue to have consequences for the market’s various sectors, depending on each party’s policy agenda and stance-not to mention how much of the government they control.
However, there’s not much use in changing your entire investment thesis according to the US election, you need the benefit of hindsight and a good overall understanding of the market-even if the market swings.
Against the backdrop of the pandemic, which is climbing steadily in the US-with 81,493 new cases reported yesterday, US and global markets won’t fully recover until the virus steadies or a vaccine comes out. Conditions will still remain volatile in the long term, regardless of who wins.
Now, that doesn’t mean some short term gains won’t be had if results aren’t contested! Watch this space.