Forget The West Wing or House of Cards. Following the 2016 U.S. presidential election campaign is like watching a T.V. drama with its own set of scandals unfolding. The two leads couldn’t be more different – Donald Trump, a successful businessman and billionaire known for his reality T.V. show and political incorrectness; and Hillary Clinton, a longstanding politician who is viewed by many as untrustworthy – both equally unpopular.
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With the grand finale just a few days away when U.S. citizens goes to vote on November 8th, the world is in close watch on who will come out on top.
Even if you’re not interested in politics, it is hard to not tune in to this election given the significant media coverage and more importantly, concerns around what the winning vote could mean for global markets.
Yes, markets have been volatile. And yes, there is a risk the volatility may continue. But before you get too caught up in the market spook, here are 3 things you must know about the U.S. elections that may help you position your investments for the long term.
1. Markets are pricing in a Clinton win
The financial markets have been pricing in a win for Clinton. Whilst both candidates have questionable policies, Clinton is arguably viewed as the lesser of two evils. She has spent time in the White House as a former First Lady, Secretary of State and U.S. Senator. As a Democrat, Clinton more closely represents the status quo.
Clinton took the lead early in the campaign and strengthened in opinion polls following the presidential debates. However, like any good drama series, news emerged at the 11th hour which caused the market to jitter. Late last week the FBI revealed it had commenced a fresh investigation into newly discovered emails relating to Clinton’s purported use of her private email server for State matters. Subsequent to publishing this article on November 7th, the FBI cleared Clinton, announcing the new batch of emails “have not changed our conclusion” that she committed no criminal wrongdoing.
However, the email controversy has seen the gap between the Clinton vs Trump polls closing and the market is starting to be concerned about a surprise victory for Trump. The S&P 500 fell on October 26th when the FBI announced reopening of the investigation and has fallen for 7 consecutive days by 2.5% as at market close on November 2nd.
Despite developments over the last week, the probability of a Clinton win at the time of writing this article is 87% according to the New York Times’ election poll. With a Clinton win largely priced in, if this eventuates we expect a relatively muted market reaction.
2. If Trump wins, there will be short term market volatility
The risk of a Trump win has been compared to Brexit, the referendum on June 23rd in the U.K. where 52% voted to leave the European Union and shocked the global markets.
What Trump stands for and his supporters have some uncanny similarities to Brexit’s leave camp. Trump’s campaign talks of penalty tax rates for imports from China, tighter immigration and border security including building a wall on the U.S. and Mexico border that would be paid for by Mexico. His policies may be radical and controversial, however it appeals to those who have become disenchanted by the current political and stagnant economic climate and believe that any change is better than the status quo. Sound familiar?
Trump’s anti-global trade rhetoric presents more political risk and will be seen as a negative for global economic growth. His policies lack detail and views have been reported to shift throughout the campaign, throwing much uncertainty on what a Trump presidency might mean.
If there is anything markets hate, its uncertainty. If Trump wins we can expect an initial sharp sell off in equities across the world as investors seek safe haven assets such as gold and bonds. In fact, market commentators are estimating around 10% to 15% fall in U.S. stocks and many overseas markets to follow suit. As more policy details come to light, investors will assess which companies and industries are really being impacted and markets can be expected to re-adjust.
3. Bigger forces are in play, no matter who wins the election
While the world is caught up on who will win the election, it is important to note that there are larger forces in play than merely Clinton vs Trump.
Heightened market volatility is not unusual during election years.
Elections cause uncertainty, particularly when there is not a clear lead causing markets to be volatile. The vote is only days away on November 8th, however the winner is not officially certified by Congress and announced until January 6th. Thus, markets are likely to continue to remain volatile for the remainder of the year. As discussed above, more muted impact is likely if Clinton wins and a larger market sell off could be on the cards if Trump wins.
If history is anything to go by, the short term market volatility is likely to follow with a relief rally in 2017 as market digests the presidency outcome.
Radical changes are unlikely no matter who wins.
It is important to remember that presidential policies still need to be supported by Congress before being ratified into law.
Currently, both the Senate and House of Representatives are controlled by the Republican party. This is seen to provide a check and balance against the current Democratic government. The market is largely expecting that the Republican will retain control. However, should a Democratic congress eventuate together with a Clinton victory, certain industries such as banks, health care and energy may come under more legislative pressure and some weaknesses in these sectors may be seen.
Markets can recover quickly following shocks.
What if Trump wins and what lessons can we learn from the recent Brexit shock?
The result of Brexit was a surprise as well but markets and economic activity recovered quickly. The day after Britain voted to leave the European Union, the global share market suffered a significant sell off. For instance, the S&P 500 experienced its largest single day drop since November 2011 falling 3.6% and losing all its gains for the year. After tumbling around 5.8% over 2 days, it quickly rebounded and reached new records in only 2 weeks.
Economics matters more than politics.
Various studies have suggested that the U.S. stock market perform better under Democratic than Republican presidents, suggesting a Clinton win could be good news for investors. However, it is difficult to measure how much of the gains were the result of the policies put in place by the previous governments, impacts of who controlled Congress and other economic factors.
What we can be more certain of is that the election itself is unlikely to have a major impact on the performance of markets over the long term, with the actual state of the economy mattering more.
The market is pricing in U.S. rate rises which is likely to start post election. This is expected to occur whether Clinton or Trump wins, and the flow on effects to the economy remains to be seen.
Long term trends generate opportunities irrespective of who wins the election.
There are broader global trends shaping the world we live in that generate investment opportunities than politics. For instance, the rapid expansion of our digitised world and exponential growth of big data will continue to change our world whether Clinton or Trump wins.
Moral of the story? Remain focused on the long term. U.S. citizens, and the world, will be glad when this election saga is over. Short term volatility may continue. However, this time period could generate good opportunities to invest in long term trends that will continue to drive the world long after Clinton or Trump finishes their time as U.S. President.
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