Why not be nervous about the US presidential election?
One of the biggest potential catalysts and sources of current nervousness is the election of the President of the United States. The election brings with it an immense uncertainty about the winner of the US election, what policy will be implemented and whether the current president will even recognize the result and the official position will not last longer than usual. However, according to some Wall Street investment banks, investors may be too nervous and most of the risks are already accounted for in the current market state.
Elections outweigh the importance of the virus
Many investors appear to be overly nervous about the presidential election and, above all, about the possibility of disputes regarding the election result as these could take months. The coronavirus pandemic is even losing its importance in the shadow of the US election, as it has become a key event for the rest of the year. The election, of course, brings with it a degree of uncertainty about the winner and the future policy of the United States administration. But the risk of a lengthy dispute over the winner is unlikely. JP Morgan assumes that the risks associated with the elections are already accounted for in the market, which is explained by the following 3 reasons.
1. Prolonged election uncertainty is highly unlikely
With the advent of the coronavirus pandemic, the electoral system is changing. This means that massive use of postal voting is expected, which could lead to the official election results not being known instantaneously. Trump has repeatedly claimed that using remote voting will lead to massive electoral fraud, even though several US states have been voting exclusively by correspondence for several years already. Trump himself, who has a permanent residence in Florida, voted by post in the last few elections.
However, problems can subsequently be caused by the technical side of the postal vote. Some votes may arrive too late, as happened last year. The post office itself recently warned several states that it might not be able to deliver the ballots sent by post in time. Some results may be disputed in court, but the process should proceed very quickly, which means that each state has enough time to count the votes and select the voters. The probability that the losing party will not accept the result of the election is very low and the final result will be known within a few days or weeks, not months.
2. The outcome of the elections will be seen in both cases positively
Value and growth stocks will most likely be in the green numbers from the end of the election to the end of the year. There are several reasons for that. Value stocks will generally benefit from a decline in risk. At the same time, both candidates will push forward the fiscal package and possibly other government spending to support the economy. The pressure to tighten the fiscal stimulus is already evident and markets are already closing in the green with any albeit faint sign of it.
Both Trump and Biden will want to open up the economy faster, with the idea that potential increases of infected during the winter months will be manageable. After all, the US economy will soon be facing some of the biggest shopping days of the year beginning on November. Whether it's Black Friday, Cyber Monday, or Christmas shopping, consumers will once again want to spend, which should be helped by the fiscal package and government incentives to support employment and household consumption. However, breaking the record from last year is unlikely.
3. The dispute between the USA and China may not worsen if Trump is elected
Ever since taking office, the US president has been pushing for China to change its trade practices and reduce its huge trade surplus with the United States. In the beginning of the year, the first phase of trade agreement has been signed which does not solve much, but is a good foundation for building better relations nevertheless.
The pace of negotiations between the countries has slowed down significantly and the escalation from the summer months has passed. Given the reaction of financial markets to recent escalations, it’s not possible to say that the dispute between countries should affect the markets. The Trump administration may take some time to review its strategy, read its options, and return to China negotiations once it has resolved the coronavirus issue.
Current market reactions
Current developments in the stock markets suggest that the stock markets in the USA are in a relatively positive mood and were not significantly derailed by the report of a positive test for covid-19 by Donald Trump. Its condition seems to be improving very quickly and investors are betting on tightening the fiscal package. The recent correction caused by huge valuations on technology stocks has put the S&P 500 at its lowest level since the end of July. There, however, the market rebounded from the 100-day moving average, which has worked very well as support several times in the past.
Chart: Daily chart of SP 500 stock index (Source: cTrader PurpleTrading)