When Americans hit the polls next month, the outcome will have significant ramifications, not just for US domestic policy, but for global financial markets.
In election season, behavioural biases are one of the biggest risks for traders. The heightened uncertainty can lead to investors “buying the rumour, selling the fact”, and taking positions ahead of election results, only to close out shortly afterward. This behaviour can cause short-term market swings. To avoid these common traps, it’s critical to recognise that elections are short-term events, to look back at past experience, and maintain a longer-term investment horizon to prevent emotional decision-making.
History is our greatest teacher
In the words of Winston Churchill, those who cannot remember the past are doomed to repeat it and past US elections have a lot to teach us. Historically, certain sectors have shown strong correlations with political shifts. Healthcare and defence, due to their reliance on government spending, tend to experience heightened volatility depending on the policy direction of the winning candidate. Commodities also performed well after Donald Trump’s last election.
Despite the common perception that elections dramatically shift markets, the reality is often more muted over the long term. While election results may cause short-term volatility, market forces often outweigh political influences over the long term. Under Joe Biden’s administration, oil and gas thrived despite his focus on climate policy, while during Trump’s presidency, renewables saw considerable growth. This stands in stark contrast to their ideological stances, proving that investors should avoid making assumptions that political outcomes will directly align with sector or asset class performance.
Winners and losers
There is no doubt that certain sectors are poised for significant regulatory changes depending on the election’s outcome. Cryptocurrency, for example, could face a major transformation. Trump has signalled a desire to make the US a global hub for crypto, which could lead to a surge in bitcoin and altcoins if he wins. On the other hand, Kamala Harris has also shown support for digital assets, though her administration might adopt a more cautious regulatory stance.
The energy sector, as always, stands at the centre of political debate. If Trump returns to power, we can expect a rollback of clean energy initiatives, potentially stalling the transition to renewables. Companies reliant on fossil fuels may benefit from such policies, while green energy firms could suffer.
Healthcare and defence stocks are two other sectors highly sensitive to election outcomes. From Ronald Reagan’s military build-up to the sweeping reforms of Obamacare, these sectors have shown how political decisions can reshape the landscape. Today, policy stances like Trump’s tariffs or Harris’ taxation changes hold the potential for significant sector impacts. However, as history has shown, market forces often have a larger sway than political favour.
Bracing for turbulence
Election night promises to be a frenzy of information. In this environment, it serves to remember our focus as investors should be first and foremost on risk management. Diversification is essential, especially when heading into a major political event. Spreading exposure across different sectors or using exchange-traded funds to gain broader exposure can help buffer against unpredictable market movements. Keeping cash on hand to take advantage of post-election opportunities is another smart move, especially once the dust has settled and the market direction becomes clearer.
While elections undoubtedly create short-term ripples, for long-term investors, the election shouldn’t dictate significant changes in strategy. Market volatility during elections is common and viewing it as an opportunity rather than a threat is crucial. Instead of reacting to every fluctuation, long-term investors can use election-induced dips to strengthen their positions in sensitive sectors like energy, healthcare, defence, and technology. The key is discipline and a diversified approach, which will ultimately yield better results than trying to time the market based on political outcomes.
Ultimately, while political outcomes may impact certain sectors, disciplined investing will always trump short-term speculation. The US election is just one of many events that impact markets, and while it may cause turbulence in the short term, history shows that long-term strategies focused on diversification and risk management tend to prevail.
Fraser Allan, head of CMC Invest, ALPHA
