All signs point to Clinton
Fiona Cincotta October 27, 2016 7:25 PM
<p>With just 13 days to go before Americans vote for their new President, both polls and market metrics are pointing towards a Clinton win and yet the S&P continues to trade range bound.</p>
Winner decided, now waiting for the final result
With just 13 days to go before Americans vote for their new President, both polls and market metrics are pointing towards a Clinton win and yet the S&P continues to trade range bound. Even weak earnings from Apple failed to trigger much downside momentum, pointing to a market that is not quite ready to concentrate on other catalysts.
The polls are suggesting a certain outcome and it would appear that the market too has already decided what is going to happen in the election, now it is just waiting the final result before making its next move.
Clinton ahead in the polls is tonic for the markets
During the earlier stages of the election campaign there was a marked volatility in the markets, with emerging market currencies such as the Mexican peso being particularly hard hit and the go to safe haven yen also bounding significantly higher making it one the best performing global currencies in 2016 , as the chances of a Trump win intensified.
However, the latter stages of the campaign, which have seen Hillary move ahead in polls, have also seen the markets price in to some degree a Clinton win. The yen has pulled back, the Mexican peso has rallied around 8% and the biotech sector which could be under scrutiny in a Clinton administration has also shifted lower; all of which all reflect Hillary’s improving chances.
Democrats vs Republicans stock market returns
Despite the stereotypical line that Republicans are better for the markets as they tend to push more pro-business policies, lower taxes and less regulation; history actually shows us that the market performs better under a Democratic president, with S&P average annual gains since 1945 found to be 9.7% under a Democratic administration, compared to 6.7% under the Republicans.
The markets like a Democrat in the Oval Office, however downward pressure on the S&P and the dollar could come into play if the likelihood of Democrats sweeping congress increases, which brings us to the second consideration for using US politics to time the US market – Gridlock.
History shows us that there is a profound difference between an administration where the President’s party runs both chambers and one who faces a battle to get any particular idea turned into law. The view being that the markets like Gridlock, as gridlock usually means that very little is achieved, nothing drastic happens and there are no nasty surprise, all positive news for a market that detest the unknown.
In a gridlock scenario, we would expect not only the S&P to extend its gains but also bond markets to flourish as the given environment usually makes it harder for presidents to be fiscally irresponsible.
Currently polls show the House of Representatives staying in Republican hands. The Democrats would need to pick up 30 seats to flip control of the chamber, a difficult task and highly unlikely in this election cycle. Therefore, the outcome is still expected be the markets favourite scenario– a Democratic President with a Republican House – a recipe for more Washington gridlock.
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