Market Impact from the Upcoming US Elections

This article was contributed by Forex.com 

By: Joe Perry, CMT

The one thing we know for sure about this election is that it’s not going to be boring. With Covid-19 surrounding the elections, mail-in ballots are preferred by many states, which means it could take days to determine the actual winner. Trump has threatened to bring the validation of the results to the Supreme Court, which could push the final results back weeks. As a result, we most likely won’t have a decision on election day. This could lead to headline volatility as “predictions” for each state come in and as “unofficial” results are released post-election, especially from swing states such as Florida and Ohio.

Source: USA Today

Best Case Scenario for Markets

Status Quo: A Trump victory with a split Congress. Wall street would continue to enjoy the benefits of lower corporate taxes while congress maintains the ability to keep Trump in check. Trump is likely to take a re-election as validation of his last 4 years in office. As a result, he will continue to push to keep the economy up and running through any kind of “Second Wave” that may result from the Coronavirus. Democrats will continue to push for a larger fiscal stimulus bill, while Republicans will try and keep the measures low. This may help the economy in its recovery; however, it may come at the cost of additional lives. A Trump victory may also make the President feel more empowered to make “better” bilateral trade deals that he feels will help the US. A split congress may help to ensure checks and balances on potential trade deals. Stocks initially higher, US Dollar lower.

Worst Case Scenario for Markets

Biden win, plus Democratic sweep of House and Senate: Wall street would not take this outcome so well. Biden wants to increase the corporate tax rate, increase government spending, and increase regulations (primarily on the environment and healthcare). Although Democrats may be pushing for more fiscal stimulus due to the coronavirus, wrong or right, it is an increase in spending. With the House and Senate behind him, he should be able to push through many of his plans. Large companies who enjoy the lower corporate tax rate currently will see a hit to their bottom lines. In addition, Biden is viewed as the more “friendly” candidate and is like to participate in multilateral trade deals that may not benefit the US as much. Stocks initially lower, US Dollar higher.

Bottom line

A Trump win will give stocks a bounce and cause a dip in the US Dollar in the short-term. A Biden win will cause a selloff in stocks and a bounce in the US Dollar in the short-term. But ultimately the longer-term path of the markets will depend on 2 variables, neither of which are directly related to the next President:

1. The Federal Reserve’s outlook on interest rates.
2. How long it takes to create and distribute a reliable, safe vaccine for the coronavirus.

The Fed is in control. If they continue to weaken the US Dollar, the narrative will be good for stocks. In addition, the quicker a vaccine is widely available for all people, the quicker things can get back to “normal”. Markets will be looking for Americans to answer the question, “Which candidate can better manage the government in light of the Fed’s outlook on interest rates AND the uncertainty of a coronavirus vaccine?”

About the Author

Joe has over 20 years’ experience in the fx and commodities arenas. He brings his knowledge of the markets from the trading side of the business, where he uses a combination of technical, macro, and fundamental analysis to provide market insights. Joe traded spot market FX and Commodity Futures for 17 years at SAC Capital Advisors and Point 72 Asset Management. Most recently, he has acted as Global Head of Sales for Forex Analytix. Joe is a regular live television FX contributor on Bloomberg News and Real Vision. He holds the Chartered Market Technician (CMT) and has a BSBA from The Ohio State University, as well as, an MBA from Fordham University.