The second day of the month of October marked just one month away from the much-awaited US presidential election, yet it was the day when the incumbent President Donald Trump tested positive for COVID-19. The news fuelled uncertainty into the 2020 US presidential election and sent shockwaves in the global financial markets. The question is whether investors should be at all concerned and do investors need to shift their allocation in such a delicate time?
Electoral volatility: what about it?
The Trump diagnosis certainly boosted volatility. During the trading session on the day of the diagnosis, the volatility index rocketed to as much as 13 per cent, with safe-haven assets seeing slight gains.
In times where we experience short-term volatility, as in the case of the US Presidential election, this will trigger nervousness among global investors. The best response during times like these is often looking away from your screen for the next month or so. I can safely say that there is a tendency of markets to overreact to daily news around elections.
Similar past scenarios suggest that as we approach Election Day, markets will react more negatively.
This encourages investors to take defensive positions pre-election, and would miss out, when typical election uncertainty dies down.
Despite the immediate negative reaction caused on the day, the negative performance was parred during the next session on government stimulus hopes, as investors opted to focus on the positive impact of the latter.
This shows that although the US election is important to the market, this time round it is very likely that it is not what is keeping investors up at night.
Trump sympathy votes on their way?
One might think that following the Trump virus diagnosis, the presidential race might intensify and increase public sympathy, such as what happened when Boris Johnson got infected back in March.
But it all really boils down to the presidential debates, as they are the main triggers of change in voter preferences.
In fact, following the first presidential debate paving the course towards the election, one saw a sharp rise in Democratic nominee Joe Biden’s odds in winning the election with a 60 per cent chance, according to the latest figures issued by the Financial Times. Hence, given the strong lead held by Biden, this will unlikely change the election outlook.
What if Trump’s health continues to deteriorate?
The potential deterioration in President Trump’s health could impact asset prices in the coming weeks as there will be too much uncertainty for investors to shrug off, just a few weeks ahead of the US presidential election. Possibly technology and momentum equities, which have experienced a rally in recent months, would be the most vulnerable to a potential sell-off.
How can we interpret the markets’ negative reaction ahead of the election?
A recent study by Schroders Investment Management suggests that the negative reaction in the market can be interpreted as a sign that Biden’s odds in winning the election have increased.
On average, equity prices in the US have fallen in the final three months before an election whenever the incumbent political party lost, but on the other hand, have rallied by 6.5 per cent if the incumbent party won. As things stand, with gains of around 3.3 per cent in the S&P 500, investors are rather uncertain about which party is most likely to win the presidential election.
One should not assume that a Democratic Biden win would be bad for markets. This is evidenced in the same Schroders report, whereby it suggests that the difference in market returns, whether it is a Democratic or Republican win, would diverge to zero.
Fiscal stimulus to the rescue?
An agreement on another aid package could act as a stabilising force on markets to face election-related uncertainty. On October 2, US House of Representative Speaker Nancy Pelosi stated that fiscal aid negotiations are continuing and that she is awaiting response from the White House on certain key areas. But on October 6, Trump said he will be postponing the stimulus talks until after the election.
Fresh stimulus could speed economic healing from the impact of the pandemic. As seen during the day of the Trump diagnosis, the fiscal programme hopes have been the loudest noise in the market.
Given the challenging period we are currently in, investors’ perceptions and views are changing. Evidently, negative news is causing short-term market volatility, causing noticeable spikes in the fear index.
Yet, I expect that market volatility related to Trump’s health and the US presidential election will be short-lived; possibly, this time round more than ever before, as markets focus on continuous fiscal aid and news on the much-needed vaccine. Having said that, we will definitely have more volatility spikes until Election Day. As a result, it might be wiser that ahead of this upcoming major political event, you barely look at your portfolio if market volatility makes you anxious.
This article was prepared by Julian Mangion, investment adviser at Jesmond Mizzi Financial Advisors Ltd. The article does not intend to give investment advice and the contents therein should not be construed as such. The company is licensed to conduct investment services by the MFSA and is a member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Ltd of 67, Level 3, South Street, Valletta, on 2122 4410 or e-mail julian.mangion@jesmondmizzi.com.