American Election and its impact on the World Financial Markets

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American Election and its impact on the World Financial Markets

 

American Election 2016. What’s the hype all about? Numerous writings daily posting on the front page of the newspaper, news channels all covering the election moves, hundreds of articles on blogs discussing the campaigning strategies, nasty debates and posts on social media and of course how can we miss the forecasts – all we see is an overflow of news and opinion everywhere! This is what elections are made of. Not to forget the atmosphere of confusion and uncertainty. And guess what breeds on uncertainty? Yes, stock market volatility! Uncertainty is the one thing, that markets hate the most! No matter who are the candidates contesting, financial markets inevitably get affected.

 

 

A valuable insight into the market is given by the periodic nature of the elections. The market seems to follow a cyclic path which moves along with the term of the president. It has been observed that since 1928, the S&P 500 index – which is a widely used indicator for the American large-cap companies market – has fallen an average of 2.8% in the year of the presidential elections. The markets remain volatile for a year post elections up till the second year, surviving all the election drama. The third year is the year of maximum returns and the returns again gradually decrease till the election year, in which it may even be negative.

 

However, it must be noted that this drop was observed when the previous president wasn’t contesting for re-election. This is because of the political nature of this event. New contestants imply new mindset, new strategies and new policies. All of this contributes to the uncertainty thus explains the dip. However, the scenario of re-election generally spreads greater calm and ultimately a stable market. Also, during the election years, the candidate seeking re-election will focus more on economic developments and easing the market, formulating more of market friendly strategies resulting in the market going bullish. Thus, it is no surprise when the same index – S&P 500 – saw average returns of 12.6% (against the last 80 years average of 7.5%) when a sitting president is up for re-election. Up to now, only 5 presidents have seen a rise of greater than 50% in equities during their term, this includes Bill Clinton, Barack Obama and other Democratic Leaders.

 

New contestants imply new mindset, new strategies and new policies. All of this contributes to the uncertainty thus explains the dip. However, the scenario of re-election generally spreads greater calm and ultimately a stable market.

 

Also, the affiliation of the candidates hardly matters – there is little difference in who is standing for Republican party and who for is representing the Democrats. It was earlier believed that Republican stand for business makers whereas Democrats are the party of labor, and that the US Market has benefitted more under the Democrats. However, this belief is quite off mark now. Both the candidates are new and their parties hold hardly any relevance for the economic policies.

The international markets are also affected in a similar way as the domestic markets, following more or less the same cycle. It is more likely that the currencies will be affected by the US Federal policy rather than the actions of the president. It is expected that Donald Trump’s conservative fiscal policy will be well received by the bond market investors who will positively buy US Treasuries. The real impact of who will win the elections will take years to assess based on the economic policies deployed by them. Overall, the policies proposed by the Democratic candidates as of now, indicate a gradual movement towards the European style social welfare state. The Republicans point out that this would lead to slower economic growth, higher unemployment and social tensions. Also, Trump has dangerous ideas on trade which can reverse the original American trade policy. It could lead to heavy tariffs on foreign imports from countries like China and Mexico. On the other hand, none of the Republicans have talked about trade relations yet.

 

To conclude, expert trend analysis claim that the elections are just a small part of the bigger picture. It’s a cycle which will come and go. Global trends like blockchain technology and cloud computing are quickly emerging and threatening to disrupt the picture of our current financial world. They will have a huge impact on both the US and global markets. Hence, investors are advised to see long term trends and focus on their own personal investment plans, meanwhile navigating through the volatile election period.

 

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