US presidential election 2020: how will the election affect the markets?

The lead-up to and aftermath of any US election can be a turbulent time for the markets, with politics typically affecting the performance of major indices such as the S&P 500, the Dow, and the Nasdaq. Elections can also affect commodities markets such as gold and oil, as well as forex markets, primarily the US dollar. How will the 2020 presidential election affect the markets this time around?

US election 2020: what will it mean for the markets?

While it is difficult to say definitively what the election outcome will mean for the markets, we can try to make educated predictions based on data, past performance, and the policies of the two candidates.

Let’s look at indices, commodities, and the dollar in a little more detail to see what the election outcome could possibly mean for these markets.

How will the election affect the stock market?

Travis McGhee, Chief Commercial Officer at Nadex, explains:

‘Generally, in my opinion, equity indices such as the US 500 and Wall Street 30 love a lower tax, lower regulation environment. So if Joe Biden were to win, it is possible these markets could move lower. If President Trump were to win, these markets could potentially move higher.’

Of course, though, many market-moving factors come into play around any election – and more so now than ever before in the midst of a global pandemic, which has already been linked to heightened volatility.

Forbes carried out an interesting piece of research into the presidents that have delivered the best stock returns, which actually shows the democrats coming out on top.[1] These are the top three:

So what about the Trump-Biden election? How might that swing the markets? We asked two top IG Group analysts to give us their personal predictions and opinions.

Chris Beauchamp, Chief Market Analyst, IG:

What happens if Trump wins?

‘While Donald Trump is viewed as the more ‘pro-business’ candidate, the nature of US politics means that Joe Biden is not exactly a full-blooded socialist. He is still going to provide a broadly business-friendly environment, although there will be less focus on the tax cuts and deregulation that have been such a hallmark of the Trump administration.'

So what if Biden were to win?

‘If the Democrats sweep the White House and Congress in a ‘blue wave’ then we can expect some market jitters about what this might mean for higher taxes and an increase in regulation, particularly for energy stocks and other firms with a major impact on the environment.’

Another option is a split outcome - what would happen then?

‘A split outcome, with Biden in the Oval Office but the Republicans holding sway on Capitol Hill would suggest a tougher legislative environment, which stock markets may prefer as it could limit the president’s opportunity for action. Clean energy and healthcare stocks will be in focus, the latter thanks to a more widespread healthcare program and the former due to a focus on moving away from oil and gas. In addition, major tech stocks might feel the pressure if the US government takes a greater interest from a regulatory angle.’

Shaun Murison, Senior Market Analyst, IG:

What happens if Trump wins?

‘US equity markets have perhaps suggested that they would be more in favor of a Trump reelection than a Biden presidency. However, markets will continue to see movement dictated by the economic outlook and path of monetary policy, leaving the Federal Reserve Bank as a primary influencer in future direction. The Federal Reserve has recently altered its economic mandate and provided guidance that lending rates in the world’s largest economy are likely to remain lower for longer, even if inflation and growth targets are met. This does provide a bullish underpin to equity markets. A second term Trump presidency presents a continuity in policy with less disruption. The expectation is for further economic spending and possibly another round of tax cuts to support US business. This is likely to be slightly more beneficial to the region’s GDP going forward which is in part why there is an expected outperformance in US equity markets on a Trump reelection.'

What about a Biden victory?

‘Should former Vice President Biden win, there is an expectation that governance would be more conventional with less relief on tax and possibly stiffer regulation, although areas like immigration and trade could see a gradual unwinding of the tensions currently prevalent. A Biden elect is expected to maintain dovish leadership at the Federal Reserve Bank who would remain extremely accommodative (as is current) to the economy.’

How will the election affect the commodities and forex markets?

While stock index markets tend to be most closely tied to the US elections, other markets can be affected too, notably commodities and forex. Oanda conducted research into the price of gold before and after previous US elections, finding that prices tended to rise over the entire election year, as well as throughout the campaign itself.[2]

The January following elections often proved to be a good month for gold too:

January 2009: 5.3%

January 2017: 5.2%

This isn’t surprising, as uncertainty often sees investors looking to safe havens such as gold. In the current environment, where the COVID-19 pandemic is causing global instability and economic challenges, gold is already up around 30% this year.[3]

Strength in gold has the potential to be bolstered by a Trump presidency. ‘Trade uncertainty, particularly with China, would remain’ said Shaun Murison, Senior Market Analyst at IG. ‘Continued geopolitical tensions are supportive of safe haven demand which benefits assets such as gold.’

A Biden presidency could prove less beneficial for gold, though. ‘The more steady and predictable nature of policy might see less safe haven appeal in the near term which could see less appetite for commodities such as gold’ Murison went on to say.

Seeing Biden in office could have an effect on other commodities, too, as well as the US dollar: ‘If an Obama era relationship is renewed with Iran and the current Trump era embargo relaxed or lifted, this could equate to lower oil prices’ said Murison. ‘The softer commodity prices may be impacted by a stronger dollar emerging in the face of a shift in policy from the former administration.’

How volatile will the markets be on election night?

The election takes place on November 3, but the circumstances are far from normal – with a larger proportion of the population voting by mail, the results might not even be known for days afterward. Markets hate uncertainty, so the election night itself and the period before the results are known could prove to be highly volatile times. This can provide an exciting environment for traders – just be careful to trade sensibly and rationally. Moving markets mean opportunity, but they also mean risk, which needs to be carefully managed.

How to trade the US election with Nadex

For investors, elections can be a risky time where long-term stock investments could dip. For traders, though, any market movement is an opportunity – you can go long or short to capture volatility. Any prediction that’s correct can result in profit, whether the market’s moving up or down.

The US election is likely to provide a whole host of trading opportunities as markets react to ongoing news and developments. You can use our analysts’ ideas and follow ongoing news to form your own predictions, so you can trade US markets with confidence on the Nadex platform.

Trading around any major event always carries risk – markets are unpredictable and often highly volatile. Nadex has three trading products, which all have risk management built in, so you will always know how much you could lose – and how much you could gain – before you decide to trade:

• Discover trading with binary options

• Explore how knock-outs work

• Find out all about Nadex Call Spreads

It's also useful to familiarize yourself with the cornerstones of trading around an election, including:

• Fundamental analysis

• Managing trading risk

• Trading with a plan

There's still time to practice trading before the election. Sign up for a Nadex demo account - you'll receive $10,000 in virtual funds. Ready to day trade now? Sign up for a live account with no minimum deposit required.

[1] Forbes, 2020

[2] Oanda, 2020

[3] Business Insider, 2020