Author: TradeQuo Source: medium Translation: Shan Ouba, Golden Finance
Every four years, the U.S. presidential election becomes the focus of attention not only in the United States, but also in the world. While it is easy to get caught up in the political farce, the real impact on financial markets is often a concern for traders and investors alike. Elections bring uncertainty, and the market reacts to it. Let's analyze how elections may affect financial markets and what you should pay attention to as an investor.
Why do elections affect the market?
The market does not like uncertainty, and elections bring a lot of uncertainty. Investors do not know which policies the winning candidate will prioritize, how these policies will affect various industries, or which direction the economy is heading. This uncertainty can lead to market volatility, especially in the months leading up to Election Day.
Historically, the U.S. stock market is more volatile in election years, but this does not mean that the stock market always falls. In fact, data shows that the stock market typically performs well in election years, especially after the election results are clear. However, sectors such as healthcare, energy, and technology may see greater volatility based on the policies proposed by candidates.
Key Factors Impacting Markets During Elections
Policy Changes: Investors closely monitor potential changes to tax policies, regulations, and trade agreements. For example, a candidate who supports raising corporate taxes could cause stock prices to fall because it would reduce corporate earnings. Meanwhile, a candidate who pushes for deregulation could boost sectors such as energy or financial services.
Trade and Foreign Policy: U.S. trade policy has global implications, especially in sectors such as technology and manufacturing. If a candidate plans to take a tougher stance on trade or impose tariffs, this could hurt businesses that rely on international supply chains or exports.
Economic Stimulus and Spending: Investors also focus on how the government handles spending, especially when it comes to large infrastructure projects or economic stimulus packages. Government spending can boost certain industries, but it can also raise concerns about the national debt and inflation.
Market Sectors: Different sectors react differently to proposed policies. For example, healthcare stocks may rise or fall depending on the expected regulatory environment. Similarly, if a candidate supports a clean energy plan, renewable energy stocks may rise, while traditional energy sectors may suffer.
What happens when an incumbent wins and a new president takes office?
Markets generally like consistency, so if an incumbent wins, the market tends to stabilize quickly because the market knows there won't be many surprises. On the other hand, if a new president takes office, investors usually go through an adjustment period as they assess the impact of new policies.
Historically, the first year of a new president's term can be a bit rough for the market, but this is not always the case. Once the new administration's policies become clearer, the market regains its momentum and usually rebounds.
Short-Term Volatility vs. Long-Term Trend
While it's easy to get caught up in short-term market volatility during an election, it's critical to keep the big picture in mind. Markets have always recovered from election-related volatility, and long-term trends are driven more by economic fundamentals like corporate earnings, global trade, and interest rates than by who sits in the Oval Office.
In fact, the Fed's actions on interest rates and monetary policy often have a more lasting impact on the markets than the president's policies, so it's important to stay calm and avoid emotional reactions to election news.
What You Should Do as an Investor?
Keep Calm: Elections can bring short-term volatility, but long-term investors should avoid making impulsive decisions. Stick to your strategy.
Diversification: A diversified portfolio can help mitigate the effects of market volatility. Diversifying your investments across industries reduces risk.
Avoid timing the market: Trying to predict how the market will react to the election is nearly impossible. Instead, focus on your long-term goals and maintain a steady course.
Conclusion
The U.S. presidential election can cause market volatility, but these swings tend to be temporary. While policy changes may impact specific industries or sectors, overall markets tend to recover once uncertainty fades. As an investor, the best strategy is to stay informed, avoid emotional reactions, and focus on long-term goals. The election is just one small piece of a larger economic puzzle, and it's wise to focus on broader trends rather than on day-to-day market moves.