The US 2020 election is coming up on November 3rd, and we’ve created this guide to help you make the most of this political events and how to trade it when volatility hits.

How to Trade the US 2020 Election

As we are heading towards the US 2020 election on November 3rd, traders are worried about how to trade the US election as well as how to cope with economic and COVID-19 related stock market volatility. The uncertainty is high around the November election outcome, and the uncertainty could have strong implications for the US and global stock markets, which have already surged almost 50% from their March lows.

Donald Trump is preparing for the second term while Joe Biden is seeking to enter the White House in November. The majority of election surveys indicate that Biden has an edge over Donald Trump, as people have been criticising Trump over the US COVID-19 spread and the increased unemployment rate as an aftermath of lockdowns.

The Us 2020 Elections Are the Biggest Risk From a Money Manager’s Point of View

A Bank of America report highlighted that the 2020 presidential election’s outcome is the biggest risk from a money manager’s point of view, which replaces the threat of the US-China trade war. Almost 29% of  managers are of the view that the US election could increase market volatility, which poses a great risk towards the financial markets. The second major risk is a trade war between the United States and China.

Meanwhile, the survey shows that bursting the US bond bubble is deemed to be the third major risk. Morgan Stanley says when uncertainty is high, the stock markets can make more range-bound movements before an election. In addition to the US election, market uncertainty has also been brought upon us by the economic recession. IMF forecasts that the US economy will contract almost 6% this year, with a potential rebound of 4.7% in the next fiscal year.

What Is the Typical Cycle of the US Election?

Below are a few facts that you need to understand about the typical, cyclical nature of US elections:

US 2020 Election - Cyclical Nature Flowchart of US Elections
US 2020 Election – Cyclical Nature of US Elections

 

  • July to Early September – Democrats and Republicans start nominating their presidential nominee.
  • September and October – The debate between presidential candidates began on various platforms.
  • Don’t Expect Big Gatherings This Time Around – The spread of COVID-19 could hinder the US election because the candidates are now required to do an election campaign online instead of holding big public gatherings
  • November – Election Day is likely to be held in November and the public will vote for their next president.
  • December – Electors cast their votes in the Electoral College.
  • January – Inauguration month for the new president.

How Does the US 2020 Election Impact the Stock Markets?

The US 2020 election has a significant impact on US and global stock markets. The data shows that markets tend to be more volatile in the election year. Some sectors receive support while some get a negative impact depending on the policies of presidential candidates. According to the Dimensional Funds report, the stock markets have generated positive results 19 times and the markets moved into the negative territory only 4 times in the last 23 elections. Let’s take a brief look at the past 10 elections to see how the US stock markets were impacted before and after the election.

US 2020 Election - Presidential Cycle
US 2020 Election – Stock Market Performance

 

  • How the stock market traded around the US 1980 Election: Democrat president Jimmy Carter lost the 1980 election and failed to gain the second term. Republican Ronald Reagan won the election. Stock markets have started retreating from previous highs, amid challenges related to the economy, inflation, and unemployment. Stock markets; however, started rebounding in 1982 as Ronald Reagan’s economic policies helped in lowering inflation and improving the employment level.
  • How the stock market traded around the US 1984 Election: The markets lost some momentum before the election, but trader’s optimism soared sharply following the victory of the Republican Ronald Reagan for the second time in a row. The stocks had hit a new all-time high in 1987 before collapsing around October 1987.
  • How the stock market traded around the US 1988 Elections: While Ronald Reagan announced retirement and he was replaced with George H W Bush, who comfortably beat Democrat candidate Michael Dukakis. The stock markets once again rebounded sharply and regained the losses that it had made in 1987.
  • How the stock market traded around the US 1992 Elections: George H W Bush lost the election against Bill Clinton. The markets soared sharply before and after the election. The S&P 500 jumped from around 700 points in 1992 to around 1200 points in 1996. The S&P 500 had grown almost 57% during Clinton’s first tenure.
  • How the stock market traded around the US 1996 Elections: Bill Clinton won the election for the second time and the markets extended the upside momentum. The stock market kept the upside momentum during Clinton’s second term. The takeoff of the dot-com bubble also supported the upside momentum.
  • How the stock market traded around the US 2000 Elections: Democrats Al Gore lost the election against Republican George W Bush, who is the son of President George H W Bush. The stock market fell sharply as the dot-com bubble busted in 2000. The Afghanistan and Iraq war has also created a negative impact on stock markets and the US economy.
  • How the stock market traded around the US 2004 Elections: George W Bush won the election for the second term. The stock markets regained the value that they had lost during the dot-com bubble. The markets generated gains in the first two years but the financial crisis started developing in 2006. The markets plunged sharply in 2007 and in 2008.
  • How the stock market traded around the US 2008 Elections: Barack Obama successfully entered into the White House as the first African-American president. Although stock markets started recovering from the historical financial crisis, the markets failed to fully optimise the sentiment.
  • How the stock market traded around the US 2012 Elections: Obama won the election for the second time and the markets extended the upside momentum. The stock markets recovered all the losses that they had made during the 2008 financial crisis. S&P 500 was trading around 2300 points before the 2016 elections. The S&P 500 had more than doubled in value during his tenure and hit new all-time highs.
  • How the stock market traded around 2016 Elections: Republican Donald Trump has beaten Democrat nominee Hillary Clinton in the 2016 election. Donald Trump, who is known for his aggressive stance, provided a new breath to the stock market, amid his slogan of “America First”. Although trade wars have negatively impacted investor sentiments, the stock markets boomed during his tenure. COVID-19 has impacted the market and economic environment before entering the 2020 election.

Past Returns Don’t Guarantee Future Performance

The historic stock market trends have never been considered a guarantee for the successful future. Traders and ordinary people (non-traders) generally assume that the third and fourth year of the presidency is more profitable than the first two years. But, it’s not true. This is evident from the last two presidential elections when the first two years remain more profitable than the last two years. It’s not wise to place your bets based only on past performance.

US Election - Presidential Election
US Election – Presidential Cycle

The market runs on two features. These two features are known as the prevailing market and economic conditions, and the future fundamentals For instance, the markets were shining at the beginning of 2020, as the majority of indices reached their all-time high in February. As mentioned-above, the market moves on prevailing market conditions and future fundamentals. The spread of COVID-19 has forced the world to go into lockdowns, which has resulted in a historical selloff in late February and early March.  After hitting a low on March 23, the stock market started rebounding on hopes that the economy will see a V-shaped recovery in the second half of the year. Investors started buying the dip, resulting in a 50% rally since its March low. All three US stock market indices are currently trading around their peak levels.

What Analysts Say on How to Trade the US 2020 Election?

Fund managers generally have a better understanding of stock markets than retail investors. This is most likely because they have better resources to make informed decisions about such situations. Here’s what the top 3 asset managers think:

Pascal Blanqué, CIO, Amundi Asset Management

The chief investment officer of Amundi Asset Management claims that stellar performance in 2020 is not expected, but they are also not expecting any major selloff in the second half of the year. Instead of elections, economic and monetary policies will drive the market cycles. The investment officer expects the US stock market indices o perform well during the US election,with expectations tha S&P 500 will gain 5% to 10%aue 

Mike Ryan-hief investment strategist

UBS chief investment strategist Mike Ryan claims that US stocks are likely to see increased volatility in the coming months, due to presidential elections. The investment strategist believes technology, healthcare, energy, and financial sectors could see wild price swingsmid presidential campaigns. This is because these sectors face slogans of major reforms.

Tom Hainlin – National Investment Strategist at US Bank

National investment strategist at US Bank Tom Hainlin believes that the stock market will underperform during elections. The investments strategist based his claim on historical trends. However, Hainlin suggests for investors to keep an eye on particular sectors to generate the desired returns and reduce risk. When it’s a general election, the equity market underperforms slightly,” explains Tom Hainlin, national investment strategist at U.S. Bank. “Not to the point where we have concern for client portfolios, but that’s what we’ve seen from historicalevidence.”

Which Sectors to Watch When Trading the US 2020 Election

Some sectors perform well before the election, while others under perform. The polls have been showing Donald Trump might not get a second chance and Democrats will take control over the White House. The political change could result in big changes in policies that were introduced by Donald Trump. If Joe Biden wins, then this means a rollback of President Trump’s Jobs Act and Tax Cuts. President Trump has lowered the corporate tax to 21% from 35% in 2018. The Tax Foundation analysis exhibits that Democrats Biden is likely to increase the tax rate to 28%, which could have a negative impact on companies’ performance.

Biden’s plans to use the money to repay debts and increase spending on Americans. Goldman Sachs forecasts that the tax hike could slash S&P 500 earnings-per-share forecast by 12% in fiscal year 2021, while Credit Suisse cut $9 off estimated S&P 500 earnings per share for the next year due to potential changes in tax laws. The analysts are suggesting investors keep an eye of each sector to stay on top of the market trends. It’s important to look at this year’s election from a “bigger-picture” perspective. The election campaigns and the announcement of new policies will contain the economic volatility within specific industries instead of making a big swing in the economy. “Usually with political issues [and] typically not a broad market set of considerations, it tends to be more sector-focused,” said Eric Freedman, chief investment officer at U.S. Bank.

  • Healthcare sector: It’s among the sectors that are impacted strongly by government policies, as many of the companies within the sector are expecting big reforms following the election. The Healthcare sector was shining during Barack Obama’s tenure while the Health care sector has generated slower growth during Donald Trump’s tenure.
  • Industrial and Agricultural sector: Industrial sector performed really well following Donald Trump’s election win amid his promises of making big investments in the public sector. He also imposed trade restrictions on imported products to support companies working in the industrial and agriculture sector
  • Energy Sector: The energy sector is likely to experience a strong wave of volatility amid different views related to regulatory guidelines. The United States now stands among the largest oil and gas producers.

Final Verdict

The stock markets are likely to remain volatile in the following two quarters of this year. COVID-19 has already jolted hundreds of companies and many of them reported historic losses for the second quarter. The outlook is also not rosy, because the majority of companies have been presenting a bleak outlook for the rest of the year.

US elections would add to the volatility and uncertainty in the coming months. Therefore, it’s important to understand all the technical and fundamental factors of each sector to successfully trade during the 2020 US election.  Further to this, not only will the stock markets be impacted by the US 2020 election, but also Forex markets. It will be a good time to keep your eye on the USD and a few of the major currency pairs.

Frequently Asked Questions

Why do analysts suggest looking at each sector instead of overall trends?

Election campaigns usually don’t impact the entire economic environment. Candidates target specific industries and provide their view and strategies about the most common sectors, such as healthcare, financials, and a few others.

Which are the best brokers for trading Forex online?

We recommend easyMarkets (sign up here) and AvaTrade (sign up here) for trading Forex.

Is it wise to follow the previous trends for the November elections?

Historic trends and returns should not be considered as a guarantee for future performance. Investors are suggested to make decisions according to the existing market environment and future fundamentals.

Why are US elections so important for stock market investors and Forex traders?

The US is the world’s largest economy and superpower. Its policies can make big changes in the global business and economic environment. Trump’s aggressive stance has negatively impacted the Chinese economy over the past couple of years. In addition to this, US elections have also had a significant impact on the US stock markets.

Is it wise to invest and trade during election volatility?

Yes, value investors enjoy trading when there is market volatility. This is because volatile price swings always provide advantageous, profit-making opportunities. However, as with all trading, you will need an effective trading strategy and trading plan to anticipate market trends.

Election campaigns usually don’t impact the entire economic environment. Candidates target specific industries and provide their view and strategies about the most common sectors, such as healthcare, financials, and a few others.

We recommend easyMarkets (sign up here) and AvaTrade (sign up here) for trading Forex.