It is already evident that 2020 will go down in history as a challenging year in the world of finance. In addition to the scheduled U.S. general election, the novel coronavirus (COVD-19) pandemic has brought unprecedented volatility to the global capital markets. Given this unique set of fundamentals, extraordinary futures trading risks and opportunities are abundant for active traders.
Participation Leads to Volatility
Market participation is the ultimate driver of risk and opportunity. Whereas consistently high trading volumes can generate prolonged trends, a sudden spike in order flow can send asset prices toppling. If nothing else, the election of 2020 is certain to produce periods of robust participation.
So how do market participants manage futures trading risks in an election year? The answer varies depending on the scenario and asset class. However, there are a few historical trends worth noting:
- Equities: According to Forbes, the S&P 500 has posted a gain during 14 out of 16 presidential election years from 1956-2016. Yields ranged from +32.4 percent (Reagan, 1980) to -37 percent (Obama, 2008), with an aggregate success rate of 87.5 percent.
- Commodities: Election-year commodity pricing is a bit more complicated than that of equities. The global economic cycle, policy issues, and overall market state can impact valuations greatly.
- Currencies: Monetary policies put forth by the U.S. Federal Reserve (FED) always play a key role in the foreign exchange markets. In general election years, currency traders often predict how the FED will react to the economic idealism of an incoming POTUS. The result is enhanced volatility for the USD against other global majors.
Although historic trends can be useful trading guides, they are far from foolproof. Ultimately, successfully navigating a U.S. electoral cycle depends on understanding when market participation is likely to spike. The periods surrounding key dates on the electoral calendar may create opportunities and enhance futures trading risks. Here are some of the key dates to watch:
- June 2: Because of the COVID-19 pandemic, many states have moved their primaries to this date. In total, 12 states and municipalities are scheduled to vote.
- July 13-16: The Democratic National Convention will be held in Milwaukee, Wisconsin. At the convention, the Democratic nominee for president will officially be named. A surprise decision or a “brokered” convention may bring volatility to the futures markets.
- Aug. 24-27: The Republican National Convention will be held in Charlotte, North Carolina. Social unrest, protests, or an unexpected division of support for incumbent Donald Trump may spike participation across the markets.
- Sept. 29, Oct. 15, and Oct. 22: A series of three televised presidential debates are held between the Republican and Democratic candidates. Any event perceived to sway the election’s outcome has the potential to drive volatility.
- Nov. 3: The culmination of the U.S. electoral cycle, Election Day is a premier time for the capital markets. Traders and investors will be closely monitoring exit polls, turnout data, and media coverage for clues on the eventual victor. Opportunities are typically limited and futures trading risks low as the American electorate heads to the polls, but volatility increases dramatically when the contest’s result is known.
Each of the dates above has the potential to create both opportunity and risk. If you’re planning to be active in the markets, then preparation is critical to optimizing performance.
Reach Your Financial Goals by Managing Your Futures Trading Risks
Within trading circles, there’s an old saying: “It’s not what you make, it’s what you don’t lose!” The cliché certainly applies to the election year of 2020―there will be an abundance of opportunities and futures trading risks.
To learn more about how you can maximize your profits while limiting losses, check out the online educational suite at Daniels Trading. With expert blogs, webinars, and cutting-edge insights, it’s a valuable tool for managing the chaos of 2020.