What happens to the stock market in the wake of the US presidential election?

Last update - 3 September 2020 By Shannon Rivkin

With the US presidential election due to be held in roughly two months (3 November), we thought it worth considering the potential impact on the market from the range of possible outcomes.

As at today, Democrat Joe Biden is the leader across national polls as well as key battleground polls, but the race is fluctuating wildly despite a health crisis, economic crisis and social crisis all unfolding at once. Meanwhile, the Republican Party’s Donald Trump remains the incumbent and a strong chance to recover from his current weak position.

Considering the performance of global stock markets since Donald Trump’s election, it isn’t a bold call to say that a Republican win would support the current strong uptrend in markets. And, generally speaking, Republican administrations are typically characterised by lower taxes and less regulation which are favourable for markets. Having said that, Democratic administrations have, at least in recent history, resulted in even more substantial gains in the stock market and the last two Republican administrations (the current one included) ended with economic crises. In the case of the GFC, Barack Obama presided over the country in the post-GFC recovery and Joe Biden is making the case now that the mistakes made by Donald Trump in handling the pandemic need to be undone by a new administration.

That is potentially complicated by Joe Biden’s position that he would lock down the country if that was the scientific guidance. However, despite the massive short-term hit to the economy that would come from a national lockdown, the relatively shallow downturn of the Australian, South Korean and New Zealand economies (at least compared to the US economy) suggests that arguably this would have a better impact on the economy. While the stock market continues to rally to new highs, there’s no debating the apparent disconnect between the US economy and its largest companies.

So, convincing victories from either party will be enough for stock markets to continue business as usual. However, with the country as divided as it is, I think there is another potential outcome which needs to be game-planned. Members may not remember the 2000 election well, but the result came down to the vote in Florida, which was a very tight race. While there was a state-wide recount taking place, the Bush campaign applied to the Supreme Court to stop the recount which ultimately the conservative-leaning court supported, thus handing the election to George W. Bush. While this may ring a bell, what is easily forgotten is that the S&P 500 fell 8.4% between election day of 2000 and the day roughly six weeks later that Democrat Al Gore conceded.

Donald Trump has made it quite clear that he believes mail ballots, which will be used more than ever because of the pandemic, are vulnerable to fraud and his newly installed Postmaster General Louis DeJoy has taken extensive steps to hamstring the US Postal Service’s ability to handle the huge influx of mail ballots it will need to deal with on election day. I think any close election result, which is a strong possibility, is likely going to end up in court for an extended period. If Joe Biden wins, I think it’s a good bet that Donald Trump will blame the supposedly fraudulent mail ballots and take his chances with the once-again conservative-leaning Supreme Court (to which he has nominated two Justices). And if Donald Trump wins, the recent US Postal interference is a sure bet to face the spotlight if valid ballots are not received in time.

For the moment, the current polling is showing a race that may end being not that contested, which would be a good result for markets. Still, if the race tightens, we will be sure to keep history in mind on the chance that the election will be a particularly ugly affair. Markets hate uncertainty, and an anticipated short-term sell-off may end up being something we can plan for and profit from. As the election approaches, we will be sure to provide advice on some good portfolio hedging strategies that may be of interest to members.

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