How Will Markets React to the 2020 US Presidential Election?
Market Reaction to Election: US Elections Coverage
- U.S. elections are coming down to the wire, with just one day to go until November 3.
- A mixed composition of Congress could be the worst outcome for financial markets, while full Democratic or Republican control of Washington, D.C. could prove positive, regardless of specific policy outcomes.
- The coronavirus pandemic makes the 2020 election cycle and the reaction in financial markets unlike any other election cycle in American history.
U.S. election season has dawned upon global financial markets, and the U.S. presidential race is coming down to the wire. Amid a haphazard federal response to the coronavirus pandemic that has culminated in U.S. President Donald Trump himself contracting COVID-19, challenger Joe Biden finds himself with a commanding lead headed into election day according to the latest polling data.
A second term of Trump or a first term of Biden could have significantly divergent outcomes for the U.S. economy and global financial markets. But it’s not just the presidential race that matter, it’s not just about Trump and Biden. The composition of the federal government in Washington, D.C. will be a significant determining factor in how different asset classes respond; a mixed Congress could result in years of gridlock, as seen during parts of the Bush, Obama and Trump administrations.
Many factors can impact the outcome of US presidential elections: the shape of the economy, a voter’s background, turnout, outcomes in swing states and more. But what about stock market returns? This special report analyzes the performance of the S&P 500 and Dow Jones leading up to the 22 presidential elections since 1932 one year and three months before the vote. Could they predict this year’s outcome?
Amidst the uncertainty of the 2020 US election, there’s value in looking back: how did President Bush and President Obama get into office? Did they face any particular challenges posed by world events? What was the impact of their policies on the US economy and the stock markets? From the dot.com bubble and housing crisis to the terrorist attacks of 9/11, every President has faced trials. DailyFX has broken down the societal and economic events during the presidencies of George W. Bush, Barack Obama, and Donald Trump.
A decade after The Great Recession, Americans are dealing with the worst economy since The Great Depression. Depending upon the outcome of the November presidential election, the US economy could take very different tracks. While there may be some agreement in terms of trade or infrastructure, Trump and Biden diverge on nearly every other economic policy facet – from taxes, to jobs, to the coronavirus pandemic recovery itself.
The global economy is showing increasing weakness and fragility ahead of the U.S. elections. The latest round of PMI readings in early-October suggested that the recovery is subsiding in parts of the developed world, mainly Europe and North America. Eroding economic fortitude exposes markets to geopolitical risks, with political threats rising elsewhere in Asia and Latin America.
The U.S. Dollar has demonstrated a fairly consistent path since 1980. But 2020 is proving anything but a typical U.S. election year, thanks in part to the coronavirus pandemic and the ensuing response by the Federal Reserve. U.S. Dollar positioning heading into the election is the focus as the near-term monetary policy path appears to be set.
The U.S. Presidential election has a historical tendency to influence financial markets as a change in leadership often brings a shift in fiscal policy. For the price of gold, there has been greater responsiveness to the macroeconomic landscape change since President Richard Nixon took steps to end the Bretton-Woods system starting in 1971. After hitting a fresh all time high above $2000/oz in August, gold prices have settled closer to $1900 in September and through the first half of October. The November election could provoke another volatile move.
US-led trade wars with China and the EU are likely to continue under Trump administration, which has struggled to make significant progress: the latest round of trade data showed that the U.S. trade deficit in September was over +40% larger than it was in January 2017 when Trump took office. Multi-layered geopolitical issues not pertaining to trade may spill into trade discussions. But a Biden administration may ease tensions with EU, despite having few articulated incentives to relieve pressure on China.
Data from the last ten U.S. Presidential elections reveals the Dow Jones Industrial Average typically climbs around an election. Still, it is difficult to attribute any equity strength to an election singlehandedly as an infinite number of themes are at play in the market at any given time. While the well-known equity volatility index (VIX) has been trading sideways for the past three months, the latest readings in mid-October show that implied volatility for equity markets is still double what it was in January 2020.
Global stock markets have been on a wild ride in 2020 thus far, juggling the coronavirus and the various monetary and fiscal decisions central banks and governments have made in response. If a global pandemic were not enough, the Dow Jones, Nasdaq 100 and S&P 500 will have to negotiate a looming Presidential election – an event that frequently dominates media and popular culture in the lead up. History reveals the stock market – more specifically the US benchmark Dow Jones index – typically rises on average before, during and after an election. 2020 surely possesses the catalysts to differ from the typical election-year however and trading opportunities are abound as a result.
--- Written and compiled by the DailyFX Research Team
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.