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The US election and your portfolio

The outcome of the race to become president of the US is not only important, it may have an immediate impact on investor portfolios.

Back when we all lived behind white picket fences, US elections were a matter of interest and curiosity. The outcome hardly changed our lives, or if it did the impact came in months or years. Now, the outcome of the race to become president of the US is not only important, it may have an immediate impact on investor portfolios.

The reason is the global leadership of the US share market, and in particular the S&P 500 index. The global influence of the US economy and its share market derive from their size, as the most important in their respective categories. Alongside the direct impacts on the Australian economy, the moves in the S&P 500 after the US election next week are a major potential influence on the Australian share market.

Analysts are often asked:

“What will happen to the market if Trump (or Clinton) wins?”

Usually beginning six months ahead of the election. The honest answer to that must be “I don’t know” because one of the major determinants of post-election market moves is the positioning leading into the election. This is why traders listen to pollsters. While polling can be and regularly is wrong, understanding the thinking of those who make investment decisions is an important step in solving the market puzzle.

Right now, the S&P 500 is approaching an inflection point (above). After hitting an all-time high at 2194 in August the market is easing back. Some chartists identify the current pattern as a “rounding top”, with the obvious implication that the market could fall from here. Recent lower highs and lows suggest both the short and intermediate trends are negative, and the index is trending down to an important support/resistance zone between 2109 and 2120 (green lines). 

Understanding what will happen after the election will require knowing where the index stands in relation to these crucial chart levels immediately prior to the election. The make-up of the two houses of Congress is also an important influence on investor reactions. In looking at the two presidential candidates, let’s assume the consensus result in Congress; that the Democrats gain control of the Senate but the Republicans retain a majority in the House of Representatives.

This table looks at possible market reactions (author’s opinion) in light of the level of the S&P500 index immediately prior to the election:

While Clinton is hardly market friendly, she is a politician of long experience, well versed in balancing the demands of high street and Wall Street. Her election would not in itself be a positive, but would justify the removal of an election risk premium that is weighing on the index.

On the other hand, and despite the fact Trump represents the reliably business-friendly Republican Party, his election could spark strong selling. The reason is the uncertainty surrounding Trump’s often self-contradictory policy announcements, and the laws of unintended consequences.

An example is the promise to revive US manufacturing. The promise appears to imply tariff barriers. Any tariffs are likely to spark immediate retaliation from trading partners, almost certainly reducing demand for US manufactured goods. Trump will also immediately curtail immigration. Where will demand for US manufactured goods rise?

Trump often sounds as is if he believes no-one outside the US can hear him. But of course, the world is watching and listening closely. In the long term, Trump isolationist policies will likely hurt North Americans more than anyone else.

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Two other Congressional scenarios present themselves:

The Republicans retain majorities in both houses

This is a better case whichever candidate becomes president. Clinton would be a lame duck president from the outset, and have to horse trade to enact policy. The worst excesses of the Democrats tax and spend approach are curtailed. If Trump is elected he is beholden to Congress, and an outright majority may see the more centrist Republicans assert some authority, fostering a less radical approach.

The Democrats attain a majority in both houses

A Clinton victory and Democrat control of both houses would temper any market enthusiasm around dodging a Trump bullet. The spite of the campaign could lead to a quick and nasty legislative agenda, and the potential for economic structural damage. 

A Trump victory may see four years of polemic and accusation, essentially stalling any policy agendas. These may be the least damaging of the Trump victory scenarios.

Change in conditions could be on its way. The US market isn’t expected to sit near all-time highs for a further extended period. Investors with  an eye on risk management could be acting this week to prepare for any scenario.


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