The US stock markets are booming despite the onset of a global recession. Despite controlling the levers of monetary policy, interest rates and taxation, President Trump will likely learn the immutable truth about the stock markets this November: that it has a mind of its own and cannot be contained by empty election sloganeering.
On the face of it, US election outcomes have no ‘fixed’ impact on the rise and fall of the stock markets. Come November, 154 million US voters, exercising their franchise, will decide the fortunes of presidential hopefuls, after weeks of high octane campaigning peppered with memorable sound-bytes. The impact of the vote on a recovering US economy is the subject of intense speculation in the US and international media.
From self-styled political pundits to anxious investors, everybody is looking to the stock markets for signs about who could win. ZeroHedge.com, a US-based news aggregator, reports that there is an unmistakable correlation between how the US stock markets perform in the three months leading up to an election and the roll of the electoral dice.
Consider this: in 14 out of 22 elections held since 1928, the ruling party came out on top whenever the markets climbed between August and September. Conversely, in 7 out of 8 instances where the markets fell, the ruling party was voted out.
Stock Market Boom or Bust?
What’s equally interesting is how the US markets react immediately after an election result is announced. Take, for example, Obama’s 2012 win over Mitt Romney. Though Obama was a known quantity, the markets did not appear enthused with his re-election. The S&P 500 had fallen 3.4 per cent within hours of the results being declared with the Dow Jones trailing at 3.2 per cent.
The anti-incumbency sentiment had been fanned by murmurs that Obama would push ahead with plans to raise taxes on capital gains, forcing rich corporates to pay more than what they did under the outgoing Bush administration. Sure enough, a roll-back of tax cuts was approved by the Senate in early 2013.
Trump’s 2016 shock victory had analysts eating their words for the second time in 4 years. Far from the bear run that almost everyone predicted, the markets rallied on hopes of increased infrastructure spending and fewer regulations. The panic sell-offs triggered by Trump’s strident foreign policy rhetoric all but evaporated within a few days. Everyone expected him to mellow down as he settled into the White House. That this did not come to pass is an entirely different matter.
The 2020 election is no different. Many analysts are again going out on a limb to predict an increase in taxes and rising inflation should Biden win. On the other hand, worries about Trump’s ham-handed policies on everything from immigration to trade are causing investors to hedge their bets and put their money into safe-haven commodities like gold, which is par for the course. The market‘s rise this time has been helped by the Federal Reserve pumping out new banknotes to boost liquidity in an economy wracked by the coronavirus pandemic.
Watch: Gold Price to surge to $2500 if Biden wins
In March 2020, US currency in circulation grew to $1.843T from $1.809T in the span of one week, according to data published by the Federal Reserve Bank of St. Louis.
The Word on Wall Street
The widening trade deficit is likely to be a key election issue with both Trump and Biden trading barbs with each other. Trump’s often abrasive drive to bring back manufacturing jobs from overseas may have yielded some results, but the US trade gap has only increased. The latest data shows that while imports from China are down, exports to Beijing have nosedived lower than exports to other countries. Trump has taken a hardline stance against Chinese theft of US intellectual property and this will continue to cast a shadow on trade negotiations with China for the foreseeable future. The strengthening dollar has also made US products more expensive in foreign markets. This is the exact opposite of what ought to have happened with the trade deficit.
Trump’s Make America Great Again agenda is predicated on reviving US economic growth by driving exports, even though countries like China reinvest a lot of their export revenues into US treasury bonds. The deficit figures quoted by Trump are only related to trade in goods. When US exports of services are considered, the gap narrows considerably. For his part, Biden has declared that he would do away with the tariffs imposed by the Trump administration. While concerns about Chinese infiltration of US research institutions linger on, traders on Wall Street will be keenly watching how the next administration tackles the trade deficit problem. Currently, though, no one is complaining, as the markets are at an all-time high.
Trump’s attempts to game the markets
In February 2020, Trump used his visit to India to deliver a message to Wall Street. “I feel I am going to win the US presidential elections. When we win, markets will go up,” Trump told a gathering of top Indian businessmen. “If I do not win, markets will crash like never before.” Though investors know better than to base their decisions on Trump’s remarks abroad, this is clearly as an attempt to sway voters into backing him. Trump is trying to make a play based on expectations of an imminent market correction that has been more or less looming for over 10 years now – despite the ravages of coronavirus.
Watch: Trump’s Election Pitch in India
The insinuation is that a Biden victory would cause the fall to be much sharper than otherwise, and wipe out a substantial chunk of investor wealth. Trump’s hubris apart, the ebb and flow of the markets are not beholden to the machinations of any single person or party in power. The stock markets have a dynamic of their own based on market factors which can be influenced by monetary policy and taxation to a certain extent, but are certainly not enough to tame the bull or encourage the bear.
Before You Go
Quiz: Can you get a perfect score on this All-American Test?