The Upcoming US Election and Financial Markets – Scenarios

The U.S. Presidential election in November turns out to be one of the most important events for financial markets, likely to drive volatility before, as well as after the vote ends. Once again, Republicans and Democrats go head to head into the race, with both parties promising a better future for Americans. 

However this time, it is not your regular election. COVID-19 takes its toll in the United States, as both the number of new cases and deaths continue to rise. The economy takes a hit, and the focus is on how to handle the pandemic while, at the same time, protecting jobs and creating economic growth.

Scenarios for a Post-Election Market

No one knows how the market will react in the case of a new Trump mandate. Nor in the case of a Biden win.

Yet some themes are likely to predominate, regardless of the party that wins the White House. Fiscal expansion, for instance, will continue at the same or even a bigger pace. The election will influence the economy, key equity sectors, and macro markets, and the winner will have to address what kind of fiscal stimulus boost will be used next year. Biden’s agenda is viewed as more progressive, with a focus on climate change and healthcare, while Trump will try to win its U.S. – China trade war.

The equity markets rallied hard on Trump’s victory four years ago. The promised corporate tax cut was a strong incentive for American corporations to bring back to America profits held abroad. Biden, on the other hand, favors a reverse of the tax cut. Will it create the opposite market’s reaction? Unlikely, because the agenda focuses on rebuilding America’s foreign policy and its place in the world as a leading nation.

Since Trump’s election, the markets have had to cope with changes in all areas – climate change, NATO, trade deals, nuclear deals, Iran deal, etc. Suddenly, everything that was built in the past at the cost of years, even decades of work, was not good enough anymore.

Macroeconomic investing requires putting together shifts in global events and an investment horizon spanning for many years. When such shifts happen, it is difficult to see the fruits of an investment decision in the first years. The election, therefore, has the power of bringing clarity to investors that took a chance four years ago.

One thing is for sure going into the election data – volatility in financial markets will rise to extremes.

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