How To Prepare For The US Election

October 13, 2020

After the 2016 US election, there were reports of two very contrasting stock trades.

Probably the most famous is George Soros. He bet on a Hillary Clinton win and lost over $1B in the days after the election results.

In contrast, Carl Icahn (who was an economic adviser on the Trump campaign) immediately went out to buy stocks after the election. And two days later, he had netted over $700M in profit, according to Bloomberg.

Now, obviously, we aren’t billionaires to be making those kinds of trades. But the election does evidently offer some very interesting trading opportunities.

Of course, there is nothing that will guarantee a trade will work, but here are some important considerations for setting up your investments ahead of November 3.

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The November Surprise

The “October surprise” is a well-known phenomenon in politics. It is a last-ditch effort to change the outcome of the election.

But for the markets, the result of the election is always a matter of uncertainty. Especially after the last election, where pollsters were giving up to 98% odds that Hillary Clinton would win.

But the polls reflected only the national popular vote (which Clinton did, indeed, win), and didn’t consider the breakdown by state that would prove decisive in the electoral college. Electoral forecasters ought to be taking this into consideration this time around.

The shift in the market after the last election was especially large because of two surprises.

First was the unexpected win of Donald Trump. And second was that in his acceptance speech, the new president-elect announced a $1T infrastructure spending program.

In general, Republican administrations are seen as positive for the stock market. Democratic ones are seen as, well, not negative but less positive.

The Set-Up

Once again we have pollsters saying that Trump is impossibly far behind the Democratic nominee. There might be some temptation to bet on a surprise election result, which is a relatively high-risk play.

On the other hand, the market is likely to react positively regardless of who wins, mostly because the election eliminates uncertainty.

The thing is, one side winning over the other simply “favors” certain sectors, and investors are unsure where to put their funds. A Biden win likely would see support to environmental consciousness (GE, Tesla), and hurt financials (insurance in particular).

A Trump win would support industrial production (BA, motor companies), and be negative for companies with exposure to China (Apple).

Are there stocks that could benefit from either scenario? Sure.

Likely, the reduction in uncertainty, and increased chances of a stimulus bill, would benefit retailers like Walmart and McDonald’s.

The Trade

Regardless of who wins, the volatility of the market is likely to be high. Investors are going to look at repositioning given the new scenario.

Throughout history, stocks have been sold in the lead-up to the election. Then, when the election is over, they start to rise, meaning that trading US indices is likely a good option.

The lack of uncertainty implies a weaker dollar, as well.

Buying an index has the additional advantage of a “built-in hedge” which is that even if the market weakens following the election, further stimulus expected in the near term regardless of who wins will likely push the S&P500, Nasdaq, and DJIA higher.

If there is a “contested election”, where the results are too close to call immediately (such as what happened in 2000), then the extended uncertainty could depress indices for a while until the election is certified on Jan 5, 2021.

By Orbex