This market is no stranger to volatility and it’s never been less so than in the month ahead of a Presidential election. In 2016, when Hilary Clinton was the expected winner, stock futures dived 5.5% that evening only to reverse higher later. Traders will be waiting and willing to make markets move again this cycle. Should we expect a similar event in this November election or can we count on a continued bull market no matter who wins?
The S&P 500 is 5% higher than the start of the year and 49% higher than March 23 low. The quick recovery from what was the most dramatic decline in recent memory gives thanks to the leverage allowed to derivative traders and low-interest rates. Derivatives are insurance contracts that traders can use to make directional bets on stocks and because of our currently ultra-low interest rates, these contracts are exceptionally cheap to use. As reported in the Financial Times on Saturday, “SoftBank is the ‘Nasdaq whale’ that has bought billions of dollars’ worth of US equity derivatives in trades that stoked the fevered rally in tech stocks… The options boom means that the US stock market remains vulnerable to further bursts of volatility” according to Charlie McElligott, a strategist at Nomura.^1
The elected President will have a influence on stocks. The Trump administration has massively deregulated, lowered corporate tax rates, dropped insider trading and related legal actions, and allowed for arguably moral mergers and acquisitions at the behest of old-guard antitrust regulators. These are the grounds for a higher market under a Trump win, even if ethically perilous. A Biden administration will rightfully be more mindful of US monetary policy, raise corporate tax rates, and take legal action where necessary; this could stop some wind on the sails of the S&P 500.
Regardless of who ultimately wins this Presidential election, ultra-low interest rates will likely continue to force stocks higher. The only catalyst for a major directional shift in stocks may be from inflation, something we have yet to see and a force outside the reach of any Presidential influence.
At Eureka Wealth Management, I will help you navigate through this election cycle and beyond by helping you maintain an adequate cash reserve and structuring investments for the long-term. I also do financial planning and tax & estate strategies. Call for a free, initial consultation at (760) 537-0791 or online at eurekawealthmanagement.com.
^1 FT Sept 5, 2020 “Big Read: US Equities”