A look to Historical US Presidential Elections
Undoubtfully, since the beginning of 2020 the world has faced several unique circumstances, with many of them to prior have been seen only in Hollywood movies. More precisely, on 11th of March the World Health Organization (WHO) recognized COVID-19 as a pandemic, exactly 100 years after the Spanish Flu, and soon enough, countries took the decision to lockdown their economies in order to limit the outbreak of the virus. As expected, decisions like this it is impossible to not affect the markets. Stocks plummeted and several corporate giants lost, almost in a week, the 80% of their value.
Investors did what it was expected. They turned their preference to safe heaven assets such as Gold, Japanese Yen and Swiss Franc. Gold after a sharp fall the first 2 weeks of March started a rally and broke the 2000 point. On the contrary, the U.S. dollar after a large increase at the beginning of the outbreak started to fall until the DXY (U.S. Dollar Currency Index) stopped to a major support level at 91.7 points.
Despite the fact that we are approaching the end of the year, there is still plenty of time for major events to occur. One of them, is the U.S. Presidential elections, which will take place on the first Tuesday of November. The two candidates to be contested for the 59th quadrennial presidential elections are the current US president Donald Trump (Republican) and the Joe Biden (Democrat). Elections traditionally are events which cause volatility in the markets, especially when we are talking for a country such as the United States. The U.S. dollar is one of the most traded currencies in the Foreign Exchange markets and news or events which can directly affect it are always taken seriously into consideration.
Since, we do not have the ability to see the future it would be wise to see how the currency reacted in the previous elections and other major events. The 58th elections held on 8th of November 2016, when Donald Trump beat the expectations and prevailed against Hilary Clinton. That unexpected win caused turbulences in the markets. As it can be seen in Chart 1, the DXY topped at the beginning of 2017 to 103.69 points, which is a 17 year high, and after suffered a long-term significant downfall, until it stopped to a prior major resistance level at 88.13 points.
Nonetheless, the current elections have several differences from those in 2016. The majority of the Wall Street giants were behind the financial support of the Republicans campaign, while now the results are mixed. It is noteworthy to mention that Joe Biden was, for more than three decades, a Senator from Delaware, one of the last tax-heavens.
Moreover, in 2016 the number of the indecision voters were significantly higher compared to now. Also, in 2016 Trump was the undisputed winner in Florida, a key state for the elections. More precisely, Florida along with Arizona is one of the top destinations for people in retirement. This group age was one of the biggest supporters of Donald Trump in 2016. This year the scenery is a bit different. The virus hit hard the older people and their responses suggest that they did not appreciate the President’s actions in order to secure their safety. Florida is one of the states where the COVID-19 struck the most and the latest polls indicate that Joe Biden gained ground and is leading the race. The outline is that impossible for the Republicans to win the elections if they do not manage to prevail in the states of Florida and Arizona.
Following, in order to see how the markets will react is to see how the VIX (Volatility Index) performed during similar occasions. In Chart 2 it is clear that the VIX increased both in 2012 and 2016, but not as much as it could have been expected. From the chart it is easier to understand that the market is afraid of high volatility in events such as the Financial crisis of 2007-2008, the Debt Ceiling crisis of 2011 and of course the outbreak of COVID in 2019. In order to elaborate on that, during the financial crisis and COVID outbreak the VIX climbed to 96.31points and 85.49 points respectively, In the contrary, during the Presidential elections of 2012 and 2016 the VIX was 19.45 points and 22.89 points.
There is still one full month until the elections but still the primary issue for the investors/trades and the rest of the population is what measures the governments will put in action in order to face, successfully this time, a second wave of the virus. Moreover, this time Joe Biden has a clear advantage over Donald Trump, and it would be hard for the current President to cover that distance. It would be wise though to never say never since in 2016 he was an outsider as well, but he managed to reverse the roles. To conclude, my personal belief is that markets have already priced the possibility of Donald Trump’s re-election and a second COVID-19 wave, so the volatility will not be as severe as many believe and a quick look in both charts can confirm that despite the beliefs the markets tend to be extremely volatile when sudden and disastrous events are taking place and U.S. Presidential elections is not one of them.
Chart 1: U.S. Currency Index (DXY)
Chart 2: Volatility S&P 500 Index (VIX)
This article is from our October 2020 edition of Trader's Insight. Check out the full magazine here