There have been many surprises in the US election race this year. Many of the assumed front-runners have fallen by the wayside, candidates thought to be outliers are now in the lead, and an audience of over 80 million tuned in to the first debate. But what does all this excitement across the pond mean for the financial markets, the global economy, and ultimately, your investments?
How presidential elections impact financial markets
The one thing markets hate more than anything else is uncertainty. We saw the impact of this after the EU Referendum, and the US election is likely to trigger a similarly bumpy ride.
This volatility will firstly come from the departure of a two-term president. Obama has been president for 8 years, and with that comes a certain level of stability; familiar policies, familiar opinions and ultimately a world which can be understood.
According to Merrill Lynch, since 1928, the Standard and Poor’s 500 (a US equity benchmark) has dropped an average of 2.8% in an election year where an incumbent is not seeking re-election. This is because an incumbent will prioritise stability and will want to show economic growth and lower unemployment; things that give the electorate confidence that they’re doing a good job, and this news provides a boost to markets.
In an election where there is no incumbent running that certainty isn’t there which boosts volatility. This year we also have a candidate with little to no political experience. That means we don’t know how they will deal with Congress or the Senate, how much support they have, so ultimately we don’t know how they will run the most powerful economy in the world. That extra level of uncertainty is bound to make markets nervous, and to create more volatility, particularly in the weeks running up to the election.
Presidential candidates with polarising social views
The Clinton vs. Trump election is highlighting social divisions in the US. The young, who have ‘nothing to lose’, seem to be siding with Clinton; whilst the older generation is looking for protection. Both sides are offering greater protection from globalisation, both want to rebuild infrastructure and the power grid; the diversions come in on social issues, such as healthcare.
These divisions will create gridlock in Congress which would lead to inaction. This is known as the politicisation of everything, every issue becomes a political battlefield. Currently, many believe this won’t be as bad if there’s a Clinton victory, but any increase in bureaucracy is bad news for growth and consumer confidence.
Electing a balanced investment approach
Investors need to be mindful that risk comes from both sides. If we have learnt anything from this election, it is that words matter. Extreme views can have a significant impact on the market, we have already seen this in emerging market currencies and we’re likely to see more volatility as we get closer to 8 November.
Uncertainty also comes in the shape of a decision from the US central bank on interest rates. Spokespeople have suggested that a hike in interest rates could come as early as December as the US try to ‘normalise’ the economy.
Investors need to avoid taking concentrated risk in the run up to the election, a portfolio needs to be balanced so it can weather the storm from either outcome. 2016 has been one of the most volatile years on record, there are no signs of this abating any time soon. The one salvation is that history suggests that we might see a market rally in 2017, on average the first year of a new presidential term sees the markets rise by 6%. But with elections in both Germany and France in 2017 and the trigger of Article 50 in the UK it has never been truer that past performance shouldn’t be used as an indicator of future performance.
