Decision 2020 – Everything You Need to Know About Making Money from the Election

Decision 2020 – Everything You Need to Know About Making Money from the Election

Decision 2020 – Everything You Need to Know About Making Money from the Election

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November’s 2020 US Presidential election will be the most important election of our lifetime. The stakes are high for Americans and the rest of the world after a crushing year for everyone. Depending on where you stand, 2020 will either end on a very high or very low note.

The coronavirus pandemic halted global economic activity and with a second wave emerging in Europe, strong leadership is needed to make sure the world does not tumble into a double-dip recession. So far, the US government failed at handling the coronavirus pandemic but it is unclear if this will cost votes for President Trump. Speaking to 2016 Trump supporters, many are unhappy with how he handled the virus but very few plan to flip their votes and if this anecdotal query is indicative of more Republicans, the President could sneak in a second term.

America is broken. The country is deeply divided on everything from the perception of Trump, the economy, racial injustice and the rush to replace Supreme Court Justice Ruth Bader Ginsburg. Mail-in voting is more important than ever and the President’s attempts to curtail the Postal Service and prevent absentee votes from being counted means the legitimacy of this election will be hotly contested.

There’s no doubt that the outcome of this coming election will have consequences far beyond America’s borders but ballot counting could drag out the results for weeks. The polls show the Democratic candidate former Vice President Joe Biden comfortably in the lead but two late September polls show more voters in Florida and Arizona favoring Trump. So the only thing we can discern with certainty is that come election night, there will be big moves in equities and currencies.

Only One Thing is Certain – Volatility

In 2016, the polls predicted a win by Hillary Clinton and when a Trump victory became increasingly likely, Dow futures dropped 750 points in premarket trading on election night. However by end of day Wednesday, stocks shot higher to fresh record highs. On Election night, EUR/USD shot up 300 points from 1.10 to 1.13 only to U-turn, give up all of its gains to end the New York trading day on Wednesday near 1.09. Similarly big moves were seen in USD/JPY which dropped like a rock when the results became clear. USD/JPY fell from 105.47 down to 101.20 in Asia trade before rallying strongly in the NY session to end the day just under 106.

Election Night Tips

If you are looking to make money on election night, there are a few important lessons to remember. The first move may not be the real move but when the moves get underway, they will be big. Given how long it takes for the poll results to come in, when the first move begins, it could last two to three hours. However once the clock strikes midnight on the eastern seaboard and the outcome is more certain, even if it’s a near term stalemate, the real move of the day will emerge and that could carry over into European and NY trade. Currencies will track the moves in equities.

Trump vs. Biden – What are the Issues?

There are so many issues at stake for this election with governments around the world watching the results with anticipation. One of the main reasons why stocks soared after a Trump victory in 2016 was because of the potential impact on tax policy. Trump is continuing his focus on lowering taxes for businesses and individuals while Biden favors increases to corporate taxes to fund social programs. The most important issue for voters is the economy and the Republicans lead on this point as they have been quick to relax social restrictions in favor of reinvigorating the economy. Trump aims for a vigorous reopening while Biden’s focus is on investments, infrastructure spending and addressing inequality.

Trump has also been increasingly antagonistic towards China and this confrontational attitude is not expected to change. While Biden may pursue a more diplomatic approach, the hardline stance could continue regardless of who wins. Build a wall was a big theme in Trump’s 2016 campaign and it resulted in border wall construction and restrictions on asylum seekers. Biden promises to undo nearly all of these changes.

Trump vs. Biden – Who’s Better for the Markets?

In the weeks ahead, we’ll be sharing more articles on Election 2020 and the investment / trading opportunities it will present. For now, we know that historically sitting Presidents normally win re-election with Jimmy Carter and George W. Bush being the only post-war exceptions. However, they rarely win when stocks fall 3 months into the election and when there is an impeached President. Trump is both so it will be interesting see what matters.

Thankfully, for investors, history is on our side. Since 1928, the S&P 500 ended positive 17 out of the last 23 presidential election years or 74% of the time with an average annual return of 7.1%. Incumbent victories are generally more positive for the markets because it means less policy uncertainty. According to a study by Dan Clifton of Strategas Research Partners who studied data going back to 1933, the markets do best when there is a Democratic President, Republican House and Democratic Senate. This is highly unlikely as it would involve a flip in all 3 parts of the legislative and executive branch. If Biden wins, the House remains Democratic and the Senate Republican, a combination not seen since 1886.

Election years are also good for the Dollar Index irrespective of the party winner. Over the past four decades, which covers eleven Presidential election cycles, the Dollar Index appreciated 9 out of those 11 election years. This year may be the exception as it would require a dramatic fourth quarter rally for the dollar index to turn positive. The trend of election year performance is less pronounced for USD/JPY as shown in the table below but the downtrend of EUR/USD is strong. This suggests that regardless of who wins in November, opportunities may be had being long dollars.

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