US elections have, of late, had a tendency to introduce high degrees of volatility in the markets.
In 2016 the unexpected election of Donald Trump as the 45th President of the United States confounded most market expectations, though there was probably less surprise than there would have been, after the Brexit referendum in June of the same year.
At the time of Trump’s elevation to high office there were a lot of questions around the future of US economic and foreign policy, as well as how he saw the oversight of the US economy.
Trump appeal to high-earners
In his campaign speeches in 2016 Mr Trump was highly critical of free trade, and the loss of huge numbers of US manufacturing jobs, but he was also critical of a tax system that encouraged US companies to hoard huge amounts of US dollars overseas due to the high levels of US tax rates, and this appears to have struck a chord with higher earners.
In the lead up to the 2016 vote investors had to contend with the prospect of a Presidential election with two equally polarising candidates, while the US markets had been under pressure with the S&P 500 posting its worst run of daily losses since 2008 in the days leading up to the vote.
The 2016 election was unique. Never had we seen two Presidential candidates polarise opinion to such an extent that most people stated that they will probably vote for one candidate over the other because they disliked the other candidate the least.
2020 election to mirror 2016?
The 2020 election appears to be going in a similar direction with the divisions as sharp as they were in 2016 with the only exception being that some voters appear exhausted by Trump’s confrontational approach. He also had the advantage of being a political unknown quantity, and an outsider in 2016.
After four years of watching him dance on the head of a pin, conducting policy in a scattergun fashion by social media, there are elements that appear to be leaning towards the much calmer approach of Democrat challenger Joe Biden.
One thing in Biden’s advantage is that he isn’t Hillary Clinton, whose remark about “deplorables” did her so much damage in the lead-up to the 2016 vote. That doesn’t mean there aren’t risks to a Democrat presidency, something that stock markets appear to be underestimating.
Markets also appear to be underestimating the prospect that the Senate, which currently has a Republican majority might not result in a Democrat majority. If the Democrats aren’t able to win the Senate then the policy gridlock we’ve seen in the past few weeks is likely to continue. This outcome is probably the most under-reported risk, because even if Biden does win the Presidency he will struggle to push through a lot of his policies due to a Republican Senate majority.
In 2016 it was notable that in the three months leading up to the November vote, markets had been on a slow decline due to huge amounts of uncertainty over the policies of Hillary Clinton, who had expressed a determination to deal with price gouging on the part of the pharmaceutical sector, and some disquiet about the behaviour of social media companies, but also uncertainty over the prospect of future US Federal Reserve rate rises.
This uncertainty over the policies of both candidates prompted declines in US equity markets in the lead up to the 2016 vote, however once the vote was out of the way and markets got used to the idea of a Trump presidency, and the outline of his policies became clearer, we soon saw a sharp reversal.
S&P 500/Nasdaq buys - 2016/2020
Source: CMC Markets
As can be seen from the graph above, sentiment around US stocks in the 28 days in the lead up to the 2016 vote showed that clients were predominantly cautious and not a little bearish, until about eight days before voting day, when buying interest increased sharply. The NASDAQ had buying interest below 30%, on day 20, before moving sharply close to 90% with the S&P 500 lagging behind, before dipping back just a couple of days prior to the vote.
This contrasts to buying interest now which is starting to turn lower, along with the price action. It would appear that rising uncertainty, as a result of a rising virus count is starting to erode some of the confidence that these tech behemoths have bulletproof business models.
With the US Department of Justice also firing the starting gun on an antitrust suit against Google this also seems a sensible course of action, given that the DOJ also has Facebook, Amazon and Apple in its sights for what they perceive as anti-competitive behaviour.
S&P 500 in the lead-up the 2016 vote
Source: CMC Markets
From what happened in 2016, it seems investors appeared more comfortable buying stocks in the lead-up to that vote than they do now. However that could still change in the next few days.
For a start, US stocks are much more expensive now than they were then, comparing the S&P 500 then at 2,100 and now close to the 3,400 level. It seems only sensible that some caution may well be required.
The chart above appears to point clients adopting a fairly neutral stance as we head into the final furlong of the US Presidential vote with sellers and buyers equally split, albeit tracking slightly lower.