As a stock market trader and market analyst, I am trying to make sense of the election’s stock market. Nearly every election, we go through the uncertainty of how the markets will react to the election results. My goal for this article is not to tell you who to vote for, but rather an unbiased view of what the stock market will do along with some sector winners and losers.
However, the 2020 presidential election is the most uncertain in both who will and how the stock market will react. As a result, it comes as no surprise that a US Presidential Election creates increased market volatility across all asset classes.
Indications are strong that the 2020 presidential election is sending more significant shockwaves through the markets than has been seen previously in 2016 or 2012. There is a considerable amount of risk as there is potential for gain in our current environment. Navigating the stock markets will be like dancing on ice. There are a few things investors can do to minimize the risk or make some plays.
- 1 So why should this election year be at any higher risk?
- 2 What to watch before election day in the stock market?
- 3 What tools should Investors use to Watch Market Volatility?
- 4 Who will when the 2020 Presidential Election and How will the Stock Market React?
- 5 What should Investors do if President Trump Wins?
- 6 What should investors do if Biden wins?
So why should this election year be at any higher risk?
It is thought that the increased risk associated with this election is not the outcome but more the very real possibility of a significantly delayed result. It is to be expected that a growing number of legal challenges could make any transition of power a difficult one, with 154 filings across 41 states already aimed at contesting balloting changes. With all possibilities still on the table, ranging from a clear win for either opponent to an outright refusal to accept the election result, it is becoming clear that uncertainly is the only certainty.
Adding to the market volatility this year is the economic uncertainly induced by the coronavirus pandemic, leaving the US in recession. To add to the current administration’s woes is the increasing skepticism surrounding the feasibility of mail-in voting, with the President himself denouncing the possibility of clear-cut results come November. Typically, with any presidential election comes the policy face-off that aims to dominate the fight on all aspects of recovery, from tax to foreign trade.
If the volatility in the build-up to an election seems concerning, this pales in comparison to Election Day itself.
What to watch before election day in the stock market?
If you are like me, you are already sick of the political ads. Unfortunately, it will like to get worse. We are expecting massive dips as the election gets closer whoever is ahead in the polls. The uncertainty on election day and the following days, if there is not a clear winner, will cause a massive drop that could lead to a crash.
Investors should know one thing – the stock market hates uncertainty. A clear winner will calm the stock market. Uncertainty will crash the stock markets.
What tools should Investors use to Watch Market Volatility?
An excellent tool to watch is VIX. One indicator of this is the increase in the hedging of investments to offset the risk this uncertainty brings to a portfolio. The Chicago Board Options Exchange created the Volatility Index (VIX), which is specifically designed to represent market volatility on a 30-day expected forward trend. This is currently predicting a VIX that is 3 volatility points higher than the same period before previous presidential elections. Analysts at Bloomberg advise that traders should be prepared to play the long game beyond November 4th; while there may be peak volatility on Election Day itself, it will by no means be the end of uncertainly in the markets.
For many, this has been something to be expected, and analysts have been reporting increased levels of hedging since January. This effect is also evident across the currency markets, as evidenced in the dollar-yen spread this month, reaching the highest implied volatility since November 1999. What this means on the world stage is that a fall in the USD often translates to a rise in the Euro, currently tracking at a 5% rise over the previous few months.
Investment Analysts at Wells Fargo demonstrated that the expected price volatility of markets on Election Day had quadrupled this year compared to a peak of 2 times in the previous two elections.
The anticipation surrounding the outcome of November’s vote plays a kept role in the volatility of markets in the run-up to the election. Recent nationwide polling has Trump leading Biden polling results in key states. However, Biden was AHEAD 7 points just a few weeks ago.
A Volatility Risk Premium is the level of protection an investor can leverage to mitigate against unexpected spikes in volatility. Here we can expect VRP to peak on Election Day and maintain heightened levels in the result’s immediate aftermath. VRP could be considerably higher should we see the democratic candidate win, and even more so should the democrats land large gains in both the House and Congress.
Who will when the 2020 Presidential Election and How will the Stock Market React?
Please note that Alphabetastock’s market analysis of the situation is unbiased and based on the research of the candidates’ policy and past market reaction. The short answer is that according to our analysis and JP Morgan, President Trump is expected to win if you look at market pricing, and the stock market should remain flat or go up after the election. The polls are dead even, with a slight edge now to President Trump in key states. That being said, the polls could change very fast, and Biden could win. If Biden wins, we are expecting a dramatic drop in the stock market.
What should Investors do if President Trump Wins?
As stated earlier, the current polls and market pricing suggest that President Trump will win the current election. There is not a strong indication that anything will change in terms of the Democrats controlling the House or gaining the Senate. Thus we will continue to see the same mixed party control of the Federal Government. The markets have historically favored this type of political division.
The two biggest threats to the market if Trump wins are: Federal Government Spending and Tax Increases.
The first and current threat to investors if Trump wins is the out of control spending by the Federal Government. This will eventually catch up to us. President Trump has not been a “fiscal conservative,” and it only was made worse by a Democrat lead house. Our current national debt is 26.7 trillion dollars. Fast forward four years and our national debt is projected to be over 46 trillion dollars or 174% GPP!
The second threat to investors if Trump wins is taxes, which will come as a result of the recent spending. President Trump has stated multiple times he is against raising taxes and pushed through the largest tax cut in recent history. Unfortunately, Trump has not been able to CUT spending. It is expected that Congress will try to pass some kind of tax to try and tackle the national debt.
Our Top Picks For A Trump Win: Gold, Silver, Consumer Staples, Tech, Materials, Health Care, and Energy.
Our Top Losers For A Trump Win: Real Estate
What should investors do if Biden wins?
If Biden wins the Presidential Election, we see the stock market react unfavorably to it because of his and political party’s stated policies. Biden has been historically a moderate Democrat, but the party itself has become more liberal socialist in recent years. Hardcore liberals like House Speaker Nancy Pelosi have had to fend off attacks from liberals as being not liberal enough.
The primary threats we see are three; Tax Increases, Medicare For All, and Increased Spending.
First, the rollback of corporate tax cuts and tax increases will cause a market drop and possible depression. This will affect all market sectors and will directly reduce earnings, dividends, and lead to layoffs.
The Second Market threat is Medicare For All. We will expect insurance companies and pharmaceuticals to be hurt the worse. It is unknown if hospitals and medical device companies will be hurt by a Medicare For All plan.
Lastly, we predict increased spending on social programs by the Federal Government that will only make the situation worse by a full-blown Keynesian economic policy. This will likely be followed or combined with a tax increase.
Our Top Picks For An Biden Win: Gold, Silver, Tech & Defense.
Our Top Losers For A Biden Win: Consumer Discretionary, Real Estate, Financials & Health Care