On November 8th, 2016 the US public will choose their next President. Indeed, this will be the 45th US President, and there has never been such a debated and hotly contested race for the White House. Statisticians will tell you that in the first year following an election you get an average stock market gain of around 6%. However, could it be different this time around?
Hillary Clinton – Democrats (after defeating Bernie Sanders)
Donald Trump- Republican (after defeating Ted Cruz)
Campaign Summary & Controversy: Hillary Clinton
Classed by the press as the ruling elite, the Clinton family is well known in US politics: most notably with regard to Hillary’s husband, Bill Clinton, who served as US President from 1993 to 2001. In addition to this, the most recent scandal was related to her use of a private email server to store emails: this goes against the code of conduct for US politicians. The subsequent investigation by the FBI, however, found no wrongdoing by Hillary Clinton and completely exonerated her. This was called a whitewash by her opponents and it is this issue which seems to have led to an increase in popularity with Donald Trump. However, with over 30 years’ experience working for various state institutions, she is by far the best qualified on paper.
Campaign Summary & Controversy: Donald Trump
Summarised as the ‘protest vote’, Donald Trump has never held any positions of office in politics and has only funded various individuals for US President (and the Senate) that would increase/ give favourable incentives to his various businesses. Given his background in business, you would naturally assume this would be the better individual to have as President from Wall Street’s perspective. However, this is not the case; given Mr. Trump’s xenophobic comments on Mexico and his suggestions regarding free trade with China as well as other parts of South East Asia. It would seem that this would culminate in the isolation of the US: something that arguably wouldn’t be good for the economy.
How will this affect financial markets?
This is a question I get asked on almost a daily basis. As with many risk events for 2016, there has been what I call a binary effect to the outcome: either very positive or negative, with an almost immediate aggressive effect. A classic example of this was the EU referendum in Britain. The situation with the Presidential election is different, chiefly as I would argue that with both candidates, the financial markets are uncertain about the outcome. I would also argue this is the worst case scenario: uncertainty is something investors do not like. This leads to instability, volatility and possibly disorderly markets in the worst case scenario.
Current betting puts the % chance of the following outcomes
Hilary Clinton – 81% win
Donald Trump – 19% win
If we can’t ascertain the result, what are my options?
As highlighted above, the true effect of either candidate on financial assets is still a massive unknown. Financial markets don’t perform well when investors are uncertain: leading to further instability and ultimately extreme volatility. It’s also likely you will see a reallocation to different asset classes as investors withdraw from equity markets or change their allocations to other assets they deem to be a more stable asset to invest in.
Gold: A key beneficiary of instability is gold. Known as the “safe haven” asset, it has been used for centuries in tumultuous times as a protection of financial wealth. It is worth noting that since the financial crises from 2008, the asset is up over 72%: this is likely to be popular just in advance of the election.
USD: The strength of the US dollar, the world’s reserve currency, has been something both Democrats and Republicans have commented that they want to continue. Even with Donald Trump languishing in most current voting polls, it would be far too soon to completely write him off. With this in mind and if we extrapolate on some of his proposed policies, which arguably should be called isolationist, this acts as the initial catalyst of trepidation to investors and traders to scale back their USD positions just in advance of the election. Key currency pairs likely to be volatile are USDJPY, GBPUSD, and EURUSD.
US equities: A change in tax reform, in how the US fiscal debt ceiling is handled, or any current clarification over the legality of immigrant employees could vastly change the outcomes of the many US equities. Remember, never in the history of a US election have the differences between either party on financial and fiscal aspects been so vast. I would say it’s unprecedented and could increase short-term volatility.
EU equities: Correlations between parent EU indices and their resultant equity constituents have always been high when compared to US equities. There is a possibility that these correlations could continue, but should we get a shock result I suspect a movement in blue chip European stock could be a dynamic from assets allocations looking to move risk away from the US.
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