- During the election years in America, all the stocks around the world suffer massive variations
- The US Dollar price tends to be upper when Democrat parties are more promising
- Stocks, commodities, and Forex are the most volatile markets prior to the American elections
American elections have been a landmark in the world economy since the beginning of democracy. In an American election year, the stocks, commodities, and Forex markets suffer massive changes, among many other variations. American elections mark the social and economic world with a volatility that is not particularly noticeable in election years, and we, at RR, analyzed why.
With the unprecedented COVID-19 pandemic felt worldwide and its economic repercussions, and the ongoing civil war in Iran, the next American presidential election becomes even more important to the world. For several months now, the press has been looking at America and its potential future leaders, mainly Donald Trump and Joe Biden, who are considered the leading candidates for the presidency.
Being the most influential world economy, if the US election descends into partisan rancor, disorder, disputed vote tallies, and accusations of “rigged” elections, it is better for America’s rivals. A collapse of the US political system would weaken American power worldwide and empower emerging economies like China.
On the other hand, despite Trump being the main protagonist of these elections, many countries are interested in removing the current president from power, not least because there is much to lose, namely at the social level. The severe threat that Trump poses to the Iranian regime gives it every incentive to intensify the conflict with the US in the coming months – even if it means risking a full-scale war – on the chance that the ensuing rise in oil prices would impact the US stock market and trigger the already felt recession.
How Could America Affect the Global Economy: An Outlook
The US Election years always come with uncertainty for the global market, as stated before. With Forex, Equities, Futures, and other demands, all interested in increasing the strength of the US dollar, which varies significantly in an election year. Apparently, the ruling party also influences the value of the American currency.
That said, the historical outlook for the stock market linked to the Election Cycle Theory unveils that the US stocks tend to underperform during the election period. In parallel, during the first year of a new presidential term, Equities are likely to stay below the average. Nevertheless, according to an Elliot Wave Forecast about the influence of the American Election on the global markets, the performance of the stocks depends on the elected president, having better results with Democrats.
The same study, including previous elections analysis, shows that during the period of a democratic president S&P 500 (SPX) & Dow Jones (DJIA), the economy gained a lot more contrast compared to the period under republican presidents that are presented in the charts above.
Accordingly, you can notice a deviation in the performance that can be explained by the difference of monetary policy used by both parties, which will affect the economic outcome during those periods. In this way, by observing the charts above, we understand GDP performance and personal income growth in the American economy. We’ll notice a big gap between democratic and republican years of presidency.
If we look at the chart above where we can understand that, most of the time, the USD Index seems to outperform under democratic presidents. At the same time, it ends up at lower levels under republican leadership.
Before and After Election: Evident Changes
Global markets fluctuate with American elections, and if volatility occurs in all these events, it also depends on the promises of each candidate/party. The following chart suggests that recently, the presidential election suggests moderate good returns in the pre-election year and, on the other hand, high returns in the election year. When everything goes back to normal—after the election—stocks return to lower levels after the election and thus bring less prominent years to the world economy.
After checking the fluctuations in the stock market, at RR, we try to explain why this market is so essential worldwide. Companies like Amazon, Google, Apple, and many others that employ billions worldwide are based in the US. The stock market strongly influences the influence of these companies on the market and, thus, the increase or decrease in jobs globally. The weight of large companies highly positioned in American stocks—a market strongly affected by elections – directly influences possible recessions and, obviously, economic growth.
This means that pre-election and election years usually are promising for the world economy, increasing the value of giant players. On the other hand, in the year after the elections, there are many losses concerning the value of the same companies in the American stock market and, consequently, in the global economy.
Markets in Election Year: What’s Happening in 2020
2020 is an election year, and this article could not come at a better time. In a year when the world was rocked by a humanitarian crisis never seen before with COVID-19 having a prominent place in the US, everyone has their eyes on American elections. The Democratic and Republican battle has been going on since the dawn of democracy, but, after several events linked to the previous Trump election, will the markets be prepared to survive this election?
Offering a particular context and reiterating what was exposed earlier in this article, in the two charts below, we can see whereby S&P 500, US 10-year Treasury yields, the broad dollar index (DXY), and VIX function in election years. In these Nordea charts, the first three do not show a clear pattern. Yields grow in seven out of 12 election years and do not, ordinarily, show a significant divergence.
Although the S&P 500 and VIX decline and rise on average in election years, this is fundamentally driven by the Global Financial Crisis in 2008. As we are experiencing a crisis never before felt, it is relevant to note the reference to the 2008 financial crisis. Excluding 2008, S&P 500 performs identically well in the election and non-election years, while the VIX index is not significantly higher or lower compared to non-election years.
In relation to the same analysis from Nordea, these patterns are expected to be repeated in 2020. It seems to us that the isolated impact of the uncertainty of the election should not be negative for the Euro and USD currencies, it has been mainly with the abrupt decline in the value of the USD in the first months of 2020. However, against the Euro, the dollar’s price drop may not only be linked to elections, but also to the fact that the US is the main stage for the continuation of COVID-19.
Historically, the US dollar has gone into elections weaker, and once uncertainty is gone, the USD has seen a particular appreciation. This year, especially with the unprecedented events and the large numbers of COVID-19 felt, the American economy has lost momentum but the global one too. However, it is forecasted to ramp up again next year, depending more on the decrease in the number of COVID-19 cases than on the elected party itself. Even so, the Democratic Party’s election is expected to be more favorable to the world economy, especially concerning possible peace agreements with Iran and China, directly threatened by the Republican Party.
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