The COVID-19 virus is at the front of market thinking. The focus on the virus, and the economic impact of containment measures, is obscuring a potentially larger and longer-term risk to portfolio values. The US election cycle is always important to the global outlook. This year, the combination of an unconventional political environment, rising populism and an increasingly inward-looking electorate could see the November Congressional and Presidential elections drive markets over the second half of the year.

The election cycle had a market impact last week, although many headline writers missed it. The US Federal Reserve surprised everyone with its inter-meeting interest rate cut last Tuesday. However share investors appeared to discount the move. After initially boosting the S&P500 index by 2% during morning trading, selling emerged and the index finished the session down by more than 2%.

The next day the North American share markets roared back to life, lifting by more than 3%. Some commentators attributed the optimism to an $8 billion commitment by Congress for anti-viral measures. Some talked of a delayed reaction to the support of central banks (?!). Others cited renewed optimism on the viral impact, despite a lack of events or information to justify the theory.

It’s much more likely US investors were at least partly driven by the emergence of former Vice-president Joe Biden as a leading Democrat presidential candidate. As the results of the South Carolina delegate vote arrived it became clear that Mr Biden was the best chance to unite moderate Democrats. This is important to markets because the alternative is the socialist “Green New Deal” policies of Senator Bernie Sanders.

The market impact of the election cycle can be broken into two phases. The first is the selection of a Democrat presidential candidate. This phase could drive up until the formal nomination at the Democrat convention in mid-July. The second phase occurs once the Democrat nominee is chosen, and starts to go head-to-head with President Trump.

With the “Super Tuesday” vote out of the way the Democrat field is down to two candidates; Biden and Sanders. Each promises a very different presidential contest. Markets are likely to react badly to any signs of Sanders ascendancy, and more positively if Biden moves ahead. This is not a market endorsement of moderate Democrat economics, but a rejection of the Sanders program. Among other goals it will make healthcare and education free for all, at a cost of $50 to $75 trillion dollars over the coming decade.

The real tussle begins once a Democrat candidate is selected. A Trump/Biden run-off could follow a more conventional path. The White House would likely try to tie Biden to previous Democrat policies and personalities, and to the “political establishment”.  Both candidates could keep the campaign based on domestic issues. This debate may move the market, but is less likely to create market turmoil. There remains a danger that one or both sides will attempt to appear strong to domestic audiences by beating on other nations, with the potential to re-ignite international trade disputes.

However the risks of a Trump/Sanders face-off are possibly much higher. The divergence in policies could lead to feverish public debate, and a shift towards policy extremes.

Individual investors must follow their own plan, but the strategic approach through this period for active investors could be to increase activity over narrower ranges. There could be more and sharper sentiment swings. Buying when confidence is low, and selling when it’s high, could prove rewarding.

The US economy remains the largest on the globe. The US dollar is the world’s reserve currency, and US share markets regularly dominate global stock moves. It’s little wonder that most investors have at least a passing familiarity with US politics. Keeping up with the latest developments in the race for the White House may contribute to better investment outcomes this year.