Since the surprise victory of Donald J. Trump in the 2016 presidential election, millions of eyes have drawn a hard focus on Tuesday, November 3, 2020. No matter your profession or walk of life, one thing is for certain: It will be nearly impossible to escape the hype surrounding next fall’s U.S. general election.
The Markets Aren’t Going to Take a Year Off
Depending upon your strategy, robust volatility can be a good thing. Given an aggressive stance toward risk, extreme moves in asset pricing can lead to extraordinary gains. Simply put, if volatility is your game, the election cycle of 2020 may be a target-rich environment.
Although it’s anyone’s guess which way trends will go in response to the unconventional stimuli, the futures markets aren’t going to take the year off. Here are two asset classes highly likely to be particularly active in the run-up to Election Day 2020.
It’s no secret that the Trump Administration has tied its wagon to the performance of U.S. equities ― and has not been bashful in doing so. In a Twitter post from June 22, 2019, Trump applauded the monthly stock market performance:
“Stock market is on track to have the best June in over 50 years! Thank you Mr. President!”
Despite Trump’s 2.5 year track record in regards to equities valuations, is the success likely to continue through the 2020 election year? At least for the S&P 500, there’s precedent for this being the case. As a matter of historical record, the S&P 500 equities index has posted gains in 18 of 22 presidential elections since Standard & Poor’s ratings began in 1928.
Traders often chalk up such trends as being coincidental, but it’s tough to deny that U.S. large-cap stocks typically show strength during an election year. If this trend once again proves valid in 2020, the S&P 500 will likely be at or near all-time highs as November 3 approaches.
The U.S. Dollar
Although technically an apolitical organization, the U.S. Federal Reserve (FED) has frequently drawn the ire of the Trump administration. A program of quantitative tightening became the FED’s go-to policy throughout the first 2.5 years of Trump’s term in office. As a result, interest rates were raised by ¼ point eight times since Election Day 2016, moves Trump has publicly criticized.
One product of the gradual tightening was the USD holding its ground globally, particularly versus the Euro, Swiss franc, and Japanese yen. However, June 2019 brought shifting economic winds and a change in the FED’s stated policy.
Concerns over slowing global growth due to the U.S.-China trade war and sub-2.0% inflation came to the forefront upon release of the 6/19/19 FED interest rate statement. The FED’s “dot plot” projections showed that its views toward policy had evolved almost 180 degrees from 2018’s “restrictive” tone. Federal Fund Rate projections were revised down to 2.1% from 2.6%, and several Federal Open Market Committee (FOMC) members called for two rate cuts by year’s end.
In the event that dovish FED policy rules the day in 2020, the markets are very likely to react in a variety of ways. Stimulated inflation due to rate cuts may weaken the USD, prompting action in ag commodities and precious metals. In addition, lax monetary policy may lead to greater equities valuations and positive GDP numbers. While these effects are far from certainties, they are definitely possibilities and lurking political footballs.
How Do I Trade the Elections of 2020?
To some degree, the world of finance has traditionally displayed a keen sensitivity to politics. And, as a general rule, the capital markets are not overly fond of uncertainty. No matter which side of the political aisle you are on, be aware that 2020 is very likely to bring unprecedented levels of uncertainty to the market.
If you are going to trade the upcoming election cycle, remember that you don’t have to go it alone. The pros at Daniels Trading have been in the futures industry since 1995, a year before Bill Clinton was elected to his second term. Rest assured that the team at Daniels has the tools and experience to successfully navigate what is sure to be a pivotal period in U.S. finance.