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US Elections and Market Volatility

Posted: Thursday, October 22nd, 2020

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US elections are just a week or so away, and the financial markets prepare for a rise in volatility. The battle is not only for the White House but also for the control of the two chambers of Congress.

So far, the probabilities favor a Biden win (40%) while the Republicans get the Senate. The next in line is a Biden and a Democrat Congress. The so-called “blue wave” should bring large stimulus closely tight-up with green spending. However, it also brings tax hikes to tackle the rise in the deficit.

US Elections

The polls do not favor a Trump win. However, should he win a second term, fiscal expansion remains key. Even if the Republicans get the Congress or not, tax cuts are on the table or more fiscal stimulus.

Wild November Right After the US Elections – Higher Market Volatility Expected

Historically speaking, November sees an increase in market volatility by up to 30% during election years. For speculators, this is good news as ranges dominated the price action for more than three months now.

Higher volatility may act both in favor and against a portfolio. On the one hand, increased volatility levels due to the US elections may offer the possibility to offer stocks at a discount. As such, investors that built speculative money balances so far into the year look for a decline in the stock market prices to add to the portfolio.

On the other hand, even if the volatility rises, the best thing to do is simply to sit on your hands. Doing nothing is a position while trying to actively manage the portfolio in volatile times is a costly process.

Fed’s Decision Follows Right After the Election Day

One day after Election Day, the Fed’s decision follows. The Fed restrained from taking additional monetary policy decisions lately. Perhaps it waits for the US elections outcome?

Anyway, by the time the Fed press conference starts, the market already knows the elections’ outcome. Moreover, if there is a time for the Fed to do some more easing, the November meeting represents the perfect opportunity.

Besides the Fed, the tight ranges since August suggest a massive breakout. The market builds energy ahead of the big event.

Moving closer to Election Day, investors will likely take some chips off the table. Effectively, it means booking partial profits, reducing exposure, hedging, adding uncorrelated assets to a portfolio, or shifting to commodities.

One way or the other, one thing is certain. A wild November awaits before us.

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