By Farzad Vajihi – Analyst of stock market and cryptocurrency, Ph.D. in economics.
An investment perspective can be formed by closely examining historical trends in trading strategies and potential market dynamics. As the 2024 US elections approach, investors are interested in the stock market’s trend. Election years historically boost US equities, and the current scenario, featuring only a Democratic incumbent and a Republican challenger, adds an exciting layer to the market outlook.
In the two months leading up to elections, the markets typically experience a pullback and consolidation. However, this trend is often reversed in the week before and after the election, providing opportunities for investors. Fixed income, particularly U.S. Treasuries (UST), face challenges during and after elections when the President’s party controls Congress. The likelihood of a divided government in 2024 is viewed as a positive factor for the markets.
Should Republicans emerge victorious, analysts draw parallels to the 2016 market landscape. This scenario could bring more robust risky assets, a steeper UST curve, and a more robust U.S. Dollar. Interestingly, this time, the potential impact on the Mexican Peso (MXN) and defensive sector movements may be less pronounced.
Banks are expected to perform well at the sector level, while the technology sector may face vulnerability due to bipartisan desires for increased regulation. Historical data indicates that equities usually perform strongly in election years, particularly when the incumbent is running. However, the short-term preference leans towards Republican challengers over Democratic counterparts. This situation is like trading tips and we can use it in our trading process.
Election results favouring the incumbent are generally considered favourable for the stock market, but markets tend to perform better in the short term when Republicans win. In past elections, such as 1976, 1980, 1992, and 2020, when incumbents lost, stock prices declined. Additionally, fixed income underperforms after Republican challenger victories, followed by a subsequent rally. In the meantime, this situation is so much like the U.S. Treasury Market Action on Election Night in 2016.
A noticeable trend is emerging where people prefer a divided government. When there is a unified government, fixed income tends to underperform during and after elections. On the other hand, equities trade more favourably in elections, leading to a divided government. Even if there is underperformance in unified governments, it is typically reversed after the election.
The outcome of the US election is anticipated to impact the strength of the US Dollar. In the past, Republican challenger victories have been associated with a stronger USD against major currencies but also against the Mexican Peso (MXN) and the Chinese Yuan (CNY). The financial sectors are expected to outperform the technology sector, with aerospace and defence performing well before and after elections when Republicans emerge victorious. Oil and gas may experience a small rally followed by a reversal, while healthcare performance tends to vary based on the party in power.
As we look towards 2024, if the Republican Party wins the election, we may observe similar patterns in our trading strategies that we did in 2016. These trading tips could involve a rise in equity prices, credit, interest rates, and a stronger US dollar. However, there could still be external factors that may introduce additional uncertainties, such as the ongoing situation in Ukraine. This would prompt investors to closely monitor any changes in the election landscape to make timely investment decisions.