Stock Market and the Election

September 30, 2020 by Matt McCracken

I didn't watch the debate last night, yet I have read several reports stating it was quite a fiasco.  I deliberately refrain from watching these events because I want to remain as unbiased as I can.  While I have an obligation to my country, I feel a greater obligation to my clients.  Thus, I am more concerned with how markets react and how I can protect my clients than what the voters or the media are saying.  

From what I read online, various polls, if such things can be trusted, gave Biden the nod last night.  And this morning we see how markets reacted, which was positive.  Does this mean the markets will react positively to a Biden win in a few weeks?  Overnight, futures initially fell but rebounded just as the market opened.    

This time in the election cycle, there is no shortage of opinions on what the markets will do after the election.  And I have found the great majority of these opinions to be historically wrong. 

I remember that prior to the 2000 election, the talk on Wall Street is that markets will never fall in an election year.  Well, guess what? They fell in 2000, were flat in 2004, and crashed in 2008.  

I distinctly remember how Wall Street pundits were claiming that markets could crater at least 10% if Trump were elected, which he was and while futures fell overnight, the market came roaring back by the following morning.  It was no secret Wall Street and the FED wanted Clinton in office as they knew she would do their bidding.  I wrote a post about this back then which you can read here.  But Trump proved to be a worthy advocate of the FED and Wall Street as well, despite all his campaign talk to the contrary.

My take is, it doesn't really matter who is elected President as far as markets go.  Would one or the other be better for the economy or foreign relations, absolutely.  But as the stock market has proven during Covid, it is practically 100% a product of FED induced liquidity.  And as long as the FED can print to infinity, the stock markets are liable to keep climbing.  Some stocks are definitely vulnerable and may crash but the market as a whole can continue to rise as long as the FED can continue to print.  And neither Trump nor Biden or any other person running for President of the US will stop that (and if one tried, he certainly would never get a major party to support him). 

If a Biden win or a Trump win upsets one of our large trading partners, such as China, Russia, Japan or Saudi Arabia, this could impact the stock market considerably.  The direst outcome would be Saudia Arabia defaulting on the Petrodollar.  But a Japan or China engaging in a wholesale liquidation of US Treasury Debt would make waves as well.  And with Russia being a "riddle wrapped in a mystery inside of an enigma" it obviously is a wildcard we always should pay attention to.  Russia which controls at least half of the world's uranium supplies and is seeing their economy tank may be tempted to play that "Trump" card and if so, it could wreak havoc on currency markets and thus all capital markets the world over.    

For example, most currencies are relatively flat this morning but the Russian Ruble is up over 1.5% versus the USD.  Does this mean a Biden win is good for Russia?  Or is Russia up to something else?  These types of anomalies are worth paying attention to and can provide clues to what may be in the works.  (For disclosure sake, I have a few clients who are short the USD:RUB pair, i.e. long the Ruble,  and have other various currency positions.)