How Traders Should Prepare for the U.S. Election
Anyone trading knows how hyper sensitive global markets are to news, whether it be economic, monetary policy related or geopolitical.
Being in sync with what markets are expecting and on alert for a surprise prepares a trader to assess a news reaction. This, in turn, allows a trader to be setup beforehand so he/she can take advantage of a news reaction rather than vice versa.
Well, in just a few days we will see the mother lode of news events, the U.S. general election. With polls so tight, it is hard to predict the election outcome and who will be the 47th president of the United States.
The question is then How Traders Should Prepare for the U.S. Election ?
One way to prepare is to look at the extreme outcomes and how that might impact trading.
A Trump Sweep
On one side of the spectrum is a Trump victory and a sweep of Congress that puts the Republicans in charge of the executive and legislative branches of government. This would allow Trump to push through his agenda, most notably his controversial tariffs proposal
Market generally factor in the most extreme case and then reassess later. In this case, one would expect the initial reaction to reflect the so-called Trump Trade, which would include:
- Selling bonds (higher yields)
- Buying stocks
- Buying dollars
Whether this turns out to be the correct reaction is for a future discussion. If this scenario played out, it would create the most volatility of any of the possible outcomes with the most uncertainties.
How Traders Should Prepare for the U.S. Election
Harris Wins with a Divided Government
The other side of the spectrum would be a Harris victory and a divided Congress, with each political party controlling one of the Houses. Under this outcome the likely split would be the Democrats controlling the House and Republicans the Senate.
It would prevent the new administration from enacting extreme parts of its agenda. Some call this gridlock and markets tend to like when this happens a it allows business to go on as usual. In this case, the next president would inherit a growing economy with low unemployment and a Fed that may be more likely to continue on a rate cutting path, even at a slower pace as the inability to pass all parts of the Harris agenda would limit the impact on the budget deficit.
Harris vs. Trump Extreme Outcomes
So a Harris win with a divided government should see the least extreme reaction once the dust settles.
A Trump sweep would see the most extreme reaction as uncertainty would rule.
There are various outcomes within the spectrum (see 8 possible U.S. election outcomes) but to prepare for the event, I prefer to look at the most extreme cases that would result in the most/least market reaction.
In any case, given how tight the polls are, I assume there are bets on both side so expect a reaction and volatility no matter who comes out on top.
The question the is how sustainable would be the reaction. The answer should ne obvious from what was outlined in this article.
How Traders Should Prepare for the U.S. Election
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