The recent market jitters may not die down any time soon, given that the US presidential election – an obvious source of potential market angst – is now just five weeks away. Philip Lawlor, head of global market research at FTSE Russell, last week noted the “potential downsides of higher taxes and increased regulation that may come with a Democratic sweep”.
The odds of a Democrat trifecta – winning a majority in the Senate and Congress as well as regaining the presidency – are about 60 to 65 per cent, estimated high-profile polling expert Nate Silver last week.
The odds of a constitutional crisis are harder to estimate, but they appear very real, given Donald Trump’s alarming refusal last week to commit to a peaceful transfer of power.
The good news for investors is a politics-related sell-off is likely to generate a decent buying opportunity. According to Political Momentum, a 2019 paper by Prof Yosef Bonaparte from the University of Denver, election uncertainty tends to distract investors and stock news “slips under the radar”.
Company-specific fundamental news tends to be crowded out by political news; investors trade indices more than individual stocks, so equities move in unison in response to election developments. The mispricing caused by this distraction means markets usually rally in the aftermath of elections.
Stocks tend to gain irrespective of who actually wins the election – investors are just relieved the uncertainty is over.
In short, the coming weeks may be dicey, but November’s election may result in a short-term opportunity for traders.
