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The markets and the US Election

The markets’ behaviour heading into the election is historically very volatile, as the markets try to price in the different parties policies and how they will affect industry.
The markets’ behaviour heading into the election is historically very volatile, as the markets try to price in the different parties policies and how they will affect industry. Uncertainty historically has increased before an election, and then dissolves post the election and goes back to normality on the new certainty. The new certainty, despite having a clear winner, maybe a bit opaque without a majority Senate to pass the Democrats policies. Volatility creates winners and losers by sectors due to different policies from the two different parties. There is a risk if there is a policy shift and corporates have to realign strategies for growth there will be an increase in volatility. Volatility was elevated this year leading into the election due to the Coronavirus and it wasn’t dissimilar to what it was like in 2008, when we had the credit crisis. Contested elections tend to have volatility remain quite high, due to uncertainty. Volumes within the market, you would think, would go up with increased volatility pre-election, certainly as investors scramble to get set if there is a clear winner. Like in 2016 however, this was not evident this time around. In 2016 everyone was convinced the Democrats would win so there was a huge increase in volumes post the election, as everyone tried to get reset for Trump’s policies. Sector wise – in the 2016 election there was not a lot of dispersion and then the day after the election we saw energy, industrials, financials and healthcare all spike considerably on the back of Trump’s win. Once we have certainty on whose policies will come through we will have clarity. However, with it still being unclear who will have a majority in the Senate these elected policies can become null and void. As it stands today (10th November) the Republicans have 48 seats, the Democrats 48 and the other parties have 2 seats. Any party needs 51 to have a majority. We have 31 of 35 races called so far.  Market directionality is usually generally positive post the election, except for the Bush win in 2000 and Obama in 2008, however, they inherited a global market sell off. In short, looking at previous trends I believe the markets should do well in the next 3 months. The sticking point for an elected Biden presidency in a Republican Senate would mean Trump will continually block Biden’s policies from passing through the Senate. This however may in turn be positive for the markets.

So the results are in and a vaccine is announced….Up, up and away?

Upon writing this we have seen a great result overnight with Phizer coming out with a very positive announcement regarding a Covid vaccine. The vaccine announcement could not be more timely for markets as the Coronavirus is spreading at an extremely fast rate again in Europe and the U.S. Many people think that this will be a more influential variable on markets than whether Biden or Trump was going to be in the White House, including Magellan’s Hamish Douglass. Markets look like they will continue on from last night and react positively. This is due to the fact of a huge second wave in Europe and the U.S, which has dampened the markets somewhat over the last month. But this could see the risk now switch to the upside? The market’s hugely positive reaction last night is making a statement that investors have been more concerned about not having a vaccine, versus who is in the White House. The U.S will now have a Democrat as President but will they win the Senate and be able to pass policies? If not, it looks like the market will shrug this off and focus on the fact that we have a vaccine plus a lot of stimulus and will hopefully keep moving higher. Companies will also now see that earnings should be affected due to the fact that there will not be any significant policy changes for 4 years, if the Democrats do not have a majority in the Senate. According to Magellan’s Hamish Douglass, the Biden win will be a “Nirvana”or “Goldilocks” for markets and corporate America, due to the fact there will be no policy change as a result of the Republicans having a majority in the senate. “We’re not going to have this magical blue wave . They won’t have unlimited power to pass sweeping legislation,” Douglass said.

POLICY

BIDEN

TRUMP
Corporate taxes Raise corporate rate to 28%, create minimum tax rate of 15% on book income Lowered corporate tax rate from 35% to 21%
Personal income taxes Restore top rate to 39.6%; raise capital gains tax to ordinary rate for those earning more than $1 million; wealth tax (details unspecified) Lowered individual rates from 39.6% to 37%
Trade Enlist U.S. allies to challenge China on trade; advocates enforcing existing trade laws while writing new rules that protect workers, the environment and labor standards America first policy involving withdrawal from TPP, renegotiation of NAFTA, trade/tech/investment war against China and early-stage trade war with EU
Healthcare Improve Affordable Care Act (Obamacare) by adding public insurance option, Medicare to negotiate drug prices, link domestic to international prices Failed attempt to repeal Obamacare in 2017
Energy Ban new leases for drilling offshore and on federal land; partially supports Green New Deal end fossil fuel subsidies; supports carbon tax; end fossil fuel subsidies; 100% clean energy by 2050 Opened more federal land to drilling; Reduced Iran/Venezuela output through sanctions
Tech and Comms Supports using anti-trust legislation to investigate anti-competitive practices No significant sector-specific policies, though DoJ, FTC & FCC investigations ongoing
Finance Support a financial transactions tax No signature legislation, but more finance-lenient interpretation of Dodd-Frank
Infrastructure $1.3 trillion plan, including green proposals No signature legislation
Immigration End family separation; protect DACA; create a pathway to citizenship; give more resources to better leadership/ training within ICE; don’t decriminalize crossing the border Border wall; record contraction in legal immigration through visa limits
Monetary Policy No public comments Favors lower rates; two board seats remain open
Minimum Wage Raise minimum wage to $15/hr Federal minimum wage unchanged at Other $7.25/hr
Source: J.P. Morgan   So it’s still a wait and see whose parties policies will get through with a majority in the Senate. Corporates will have more clarity on how to strategise going forward and the heavily hit industries from Covid will hopefully continue to bounce back, as we saw last night in the U.S with airlines, tourism and almost every other sector jumping significantly. It’s not only in the U.S where we saw significant rallies. In the UK, Rolls-Royce (LSE:RR) and International Consolidated Airlines Group (LSE:IAG) were also massively up on the day with the Rolls-Royce share price up around 45% and IAG up 35%. Locally, as of 3pm 10th November, Qantas is up 10%, Webjet is +15% and Flightcentre +12%. So the “opening up trade” is now looking like it has a lot of legs and it definitely has a lot of ground to make up, such as Tourism, airlines, and hospitality. In ‘The Trading 360 Summit’ last night we featured a “Trading the US Election” special.  A group of professional traders debated where they think the market will go from here and how to trade it, including:
  • If the market is going to go for a bull run?
  • What they will be trading?
  • What they think the market will do over the next three month
If you would like to watch a recording of the session you can do so here. Or join us live next Tuesday at 7pm AEDT for the sixth and final week of the “Trading 360 Summit”, where the panel speakers will come together to discuss the keys to success. Book here.  Past performance is not a reliable indicator of future performance. Sources:  

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