How the election may affect markets
Over the past few weeks, the financial markets have experienced a great deal of volatility. This has occurred for several reasons, including a surge in COVID-19 cases worldwide, mixed earnings reports from large companies, and the upcoming presidential election in the United States. This volatility was certainly expected by many institutional and individual investors, especially given the massive implications of this week's election. Yet, it is impossible to say whether this volatility will remain after the election is decided and how long the markets will remain unstable.
One possibility is that the election will be decided swiftly and that the markets will react positively. This is perhaps the best outcome, both politically and economically, as the election would be uncontested. A landslide victory for either party would likely result in economic optimism, but this is probably not going to be the scenario that unfolds this Tuesday, especially given that some states will not have all of their ballots counted until later in the week.
Another possibility is that one of the candidates will claim victory on Tuesday night or in the days following before the results are officially determined. This is somewhat of a nightmare scenario for the U.S. domestic markets, as controversy over who wins the election will cause widespread uncertainty among individuals and institutions. This would lead to inevitable market volatility, likely trending in the negative direction for the vast majority of publicly listed companies.
These two possibilities represent the best and worst of what could happen this week, generally speaking. What is most likely, though, is that neither of these scenarios will fully happen. Instead, the election will probably be close, and the results may not be known for several days following Nov. 3, with neither candidate claiming victory. In this scenario, the markets' response is entirely unknown, as the United States will find itself in a state of limbo.
Once the election results are determined, and one candidate is acknowledged as the victor, the markets will react once again. This reaction, though, depends explicitly on who wins: Trump or Biden.
If Trump wins, several sectors within the market will benefit more than from a Biden victory. These sectors include financials, energy, aerospace, and defense. On the other hand, if Biden wins, a few other sectors will be well-positioned to flourish with a Democrat in the Oval Office. These sectors include renewable energy, healthcare, and technology.
The expected rise of these sectors corresponds directly to the Trump and Biden campaigns' policy implementations. Trump supports lower corporate tax rates, less financial regulation, higher defense spending, and the oil and gas industry's success. However, Biden supports a transition to green energy, making healthcare more accessible, and new COVID-19 restrictions that will result in increased technology usage, especially with people working and learning from home.
Thus, if you plan to anticipate how the markets will respond to the election, there are a few important factors to consider: how the election results will be determined, how long it will take for these results to be determined, and who the winner will actually be. As always, though, the financial markets are challenging to predict, and this week will undoubtedly exemplify that.
~Sam Leathe `21
