The Tribune

ActivTrades Weekly

By RICARDO EVANGELISTA

www.activtrades.bs

The northern hemisphere summer is over, but the political temperature is still rising. We are just 3 weeks away from the American Presidential election of November 3, when US voters will decide who’s to govern the country over the following 4 years, with ballots also being cast for Senate and Congress representatives.

A ferocious electoral campaign has been deployed by both sides, with the pinnacle of the by-partisanship reached during the first televised debate between the two presidential candidates, Joe Biden and Donald Trump, who despite testing positive and currently recovering from COVID is widely expected to remain in the contest.

Much is at stake, with two very distinct characters and sets of policies competing to determine the future, not only of the USA, but to some degree that of the rest of the world, too. Voting and the outcome of the election will be capturing the attention of countless observers around the world, with financial markets’ traders expected to be amongst the first to provide a consequential reaction.

Uncertainty over who will win the election and the prospect of a close call victory for Joe Biden have been influencing the behaviour of traders. From early September until recently, a contested result had been the base-case for many investors, who by pricing-in such a scenario triggered a correction (fall) in the main stock exchanges. Alongside the correction in the price of shares, there was an increase in demand for refuge assets, such as treasuries, causing a fall in the yields these generate, which ultimately halted the tumble of stocks by reigniting risk appetite; this cycle prevented a more pronounced collapse in stock prices.

However, over the last few days Joe Biden is emerging as a likely clear winner, with the Democrats also well positioned to take the house and the senate. Such a scenario would entail a smoother transition of power, which socially and economically would be beneficial for the country. But would it also be seen as positive by stock traders? The answer is no, at least not initially. Joe Biden has already stated his intention to raise capital gains taxes and, probably, will also hike corporate taxes and focus on regulating the tech sector giants; unlike Trump, who is promising to cut taxes and is not a fan of regulation.

A clear Democrat win is very likely to trigger a stocks’ sell-off. Many investors would want to cash-in their profits before new taxes are introduced. At the same time, fears over a stricter regulatory environment that could affect the tech sector, the great locomotive of this year’s market rally, are also likely to generate selling pressure.

Although a clear-cut win for one of the candidates is in many ways the most desirable outcome for the upcoming election, that is not necessarily the case for investors (unless the winner is Trump, of course). Much has been said about the disparity between Wall Street and Main Street, and the situation here described provides another illustration of the sometimes-counterintuitive logic underpinning the actions and expectations of investors.