Trading the US Election 2020: What to Expect and How to Approach
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- The market’s reaction to the US election over the last few months
- Possible election outcomes and their effect on the financial markets
With the US election taking place today, traders and investors are looking for a direction amid increased market volatility. Uncertainty is expected within the financial markets during any US election. However, this year, other factors are also contributing to the market’s high volatility.
The U.S. presidential election is happening on November 3rd, however, the actual outcome may not be known for days or weeks after. We can expect the jittery market mood to persist for quite some time.
What Happened Last Week?
Last week, the market recorded the worst week for global stocks since March, at the height of the pandemic. Now, one day before the election, the markets are faring significantly better. European indexes are close to 2% gains while the U.S. market opened strongly to the upside with gains north of 1.3%. The heightened market turbulence we witnessed during the last sessions is partly due to the rapidly rising numbers of confirmed Covid-19 infections. The other part is largely attributed to the rising investor fear that Tuesday’s election result will prove inconclusive and market participants will have to wait for brighter days in a volatile political climate. As the market hates uncertainty, what will matter most to investors is the degree of victory.
What are the speculations on the next US president and the financial markets?
As polls indicate a Biden win on the 3rd of November, a win for the Democratic Party can bring changes in the energy and healthcare sectors. Joe Biden plans to increase taxes while at the same time promising to modify the current 401k tax in order to incentivize people with lower income to contribute to their 401k. Biden could also be seen as more stable, which can help to reduce market volatility.
On the other hand, President Donald Trump presents more favorable tax policies to businesses, high-income earners, institutional and individual investors. Moreover, his announcements on social media often produce rapid and unexpected moves in the market that appeal to traders.
How will the possible outcomes affect the markets?
Any outcome could alter the course of the financial markets, both in and outside of the U.S. There are many reasons to be optimistic about the U.S. markets in the aftermath of the elections Irrespective of the outcome, the market will need to receive the long-awaited fiscal stimulus to boost the U.S. economy. With a Republican win, incumbent President Donald Trump has vowed to provide a “very big” package. This will be a tough battle as he will have to deal again with a divided Congress, that is, the status quo would be maintained.
In the case of a Democratic win, rival Joe Biden has promised to deliver $2 trillion to climate change and trillions more to be distributed across the U.S economy. In order to do this, he will need the Democrats to win both houses of Congress (the House of Representatives and the Senate). This scenario is called a “blue wave” or a “blue sweep” and with it, Biden’s large-scale vision becomes a real possibility.
Even if there’s a clear outcome to the election tomorrow, traders and investors can still expect the volatile environment to continue as the U.S. needs to keep battling the pandemic that is sweeping across the country. Furthermore, the market will be relying heavily on the cash injection so that it can keep the momentum and stay afloat.
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