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Traders work on the floor of the New York Stock Exchange. The US presidential election less than a month away, stress-levels among most market participants are expected to be tested in the weeks to come. Image Credit: REUTERS

Dubai: Although investor nerves are relatively calm now, with the US presidential election less than a month away, stress-levels among most market participants are still expected to be tested in the weeks to come.

The upcoming US presidential election are widely viewed as a likely important catalyst for stock market moves in coming months as investors gauge the probabilities of a contested vote and the policies a potential winner would enact.

“While every US presidential election is contentious, this year’s race seems especially divisive,” noted Colin Moore, global chief investment officer at asset manager Columbia Threadneedle Investments.

Charged rhetoric gets markets edgy

“Partisanship is extreme, and the difference between Donald Trump and Joe Biden in approach, personality and behaviour is stark and the charged rhetoric may increase the uncertainty and anxiety for investors as we approach Election Day,” Moore added. “Most recently we saw evidence of this anxiety as the market reacted to news of President Trump’s positive COVID-19 test.”

During the month of September, markets witnessed bouts of volatility and largely ended the month lower, but the trajectory has been moving upwards since as investors are turning comparatively less nervous about the upcoming national election.

This is mainly due to the polls continuing to show a wide lead for former Vice President Biden. Democratic nominee Joe Biden is ahead in national polls and in betting markets the former vice president is favored to win with an average 64 per cent likelihood, according to RealClearPolitics.

How previous elections hit markets

A review of market data for the S&P 500 going back to the 1930s revealed that certain patterns emerged over those 90 years. The analysis showed that, on average, both equity and bond markets showed more muted performance in the year leading up to a presidential election than they did at other times.

In any given 12-month period, equities provided gains of about 8.5 percent — but in the year leading up to a presidential election, gains totaled less than 6 percent. Bond markets provided similar results, with returns of around 6.5 percent in the year leading up to a presidential election, compared with their more typical 7.5 percent in any given 12-month period.

After an election, stock market returns tend to be slightly lower for the following year, while bonds tend to outperform slightly after the election. It doesn’t seem to make much difference which party takes office, but it does matter whether control of the White House changes hands.

When a new party comes into power, the analysis found that stock market gains averaged 5 per cent. When the same president is re-elected or if one party retains control of the White House, returns were slightly higher, at 6.5 per cent.

Global pandemic changes narrative?

“Election cycles typically don’t have much influence on the behaviour of the markets in aggregate. In many ways, this election is no different. But in one way it couldn’t be more different: it is being contested during a global pandemic that has brought regular economic activity to a virtual halt,” Moore explained.

“The election-related short-term volatility and the structural pandemic market effects are, in effect, amplifying each other, and we are experiencing one of the longest periods of sustained high volatility that we’ve ever seen.”

While most economists and strategists view that financial markets and economic prospects worldwide will be affected by whoever enters (or remains) in the White House in the immediate period following the vote, some add that the possibility of a contested election is being underestimated by markets.

Election’s end-result on economy, markets

“But while we believe the election is unlikely to impact the overall direction of markets, there will likely be some short-term uncertainty, and there certainly could be effects on industry groups and individual companies,” noted Moore.

In terms of overall market performance, markets do well under Republican and Democratic presidents, Moore analysed, while adding that since the Truman administration just after World War II, only Richard Nixon and George W. Bush had negative market returns during their tenure.

“What does the election really mean for the economy, markets and investors? In my view, elections cause a lot of volatility and anxiety beforehand, and then not much of substance for the broad economy and financial markets afterward.

“A lot of that temporary volatility comes from politicians making speeches about policies and programs that they are rarely able to fully enact. Long-term market and economic direction are about what actually happens, and in that respect, a single election is almost irrelevant to our long-term outlook,” Moore opined.