Above all, the Democrats vs. Republicans battle has a powerful impact on all asset classes. We should naturally start with the dollar, the currency of the United States.
The Forex market
The U.S. Dollar (USD) typically reacts strongly to the outcomes of U.S. elections. For example, a Democratic victory might lead to expectations of increased government spending and concerns over inflation, potentially weakening the USD in Forex markets. Conversely, a Republican victory might boost confidence in business-friendly policies, leading to a stronger dollar.
However, it should not be forgotten that the US monetary system is based on what the central bank does. The Fed determines its monetary policy based on many factors, such as employment (found in the NFP report), which affects the overall price level, together with government spending or direct taxation.
By adjusting interest rates, the FED influences inflation and, at the same time, the dollar’s value. As USD history shows, the dollar tends to appreciate when the market expects rates to increase. As monetary policy easing is expected, the dollar weakens. The easiest way to measure its strength is the USD Index and the strength of currency pairs such as USD to JPY or EUR to USD.
The commodities market
Commodities like oil and metals are also influenced. For instance, a Republican administration’s focus on domestic energy production might drive down OIL and BRENT prices by increasing supply. In contrast, Democratic policies favoring environmental regulations and restrictions on drilling could lead to tighter supplies and higher prices.
Moreover, environmental issues such as oil drilling in Alaska, particularly under the Biden administration, have sparked debates on energy production, further affecting the supply and pricing of essential commodities.
The pricing of metals like gold (XAUUSD) and silver (XAGUSD) is closely tied to the strength of the USD. Investors often turn to precious metals as safe havens when the dollar weakens, driving up their prices. The outcome of the U.S. elections can, therefore, play a pivotal role in determining the direction of these markets.
Impact on the stock market
Stock market reactions to the Democrats vs. Republicans clash can be swift and significant. Investors pay close attention to the potential economic policies of the incoming administration.
The main benchmarks
American indices like the S&P 500, NASDAQ, and Dow Jones tend to show more volatility during election years, with different sectors rising or falling based on expected policy shifts. For instance, technology stocks soared during the Obama and Biden administrations due to their focus on innovation and clean energy. On the other hand, energy and defense sectors flourished during the Trump administration due to his deregulation and defense spending policies.
It should be noted, however, that the behavior of the broad market will also depend on future tax proposals, especially for large corporations. Indices may decline if a given candidate begins to introduce higher taxation of companies included in it. Higher tax liabilities will translate into higher product prices or reduced producers’ margins and their profits. In turn, tax cut proposals should have a pro-growth effect on the indices.
S&P500 in an election year
As statistics show, election years are usually positive for the stock market. Over the last 24 elections, the S&P500 ended the year higher 18 times, which gives a positive result in 3/4 of cases. The index also behaved in a certain way. The best quarters are the second and last. The first one remains relatively flat, and the third one ends with declines in September, lasting sometimes into October. What situation are we dealing with now?
S&P500: 2024 election behavior.
The index’s performance shows a shift in periodic declines. The first one regularly occurred in March, and this time, it happened in April. The classic September weakening occurred in the second half of July and was deepened by the carry-trade unwind on Sept 5th. Then, the index reached its local low, since which has been rising.
Another deviation is the rate of return. Even though the year isn’t over yet, it’s a crazy 20% for just three quarters. This is also a dizzying result compared to the election year. The average rate of return is 7.05%, and the median is 9.54%. So, for now, ROI is more than twice as high as the median.
What does history say about the Q4?
The average and median return for Q4 of the election year are 1.83% and 2.91%, respectively. Will it be the same this year? Only time will tell.
Companies: A micro perspective
American equities such as Apple, Tesla, and ExxonMobil are closely tied to the outcome of U.S. elections. Companies in renewable energy sectors tend to see growth under Democratic leadership, while traditional industries like manufacturing and defense benefit more under Republican rule.
To make the most of the election results, you should first review the party’s program and history to determine which sectors of the economy and which equities might be subsidized. As a result, certain companies might record higher profits, and the price of their shares increases.
The information provided on this website does not, and is not intended to, constitute investment advice; instead, all information, content, and materials available on this site are for general informational purposes only.
