It’s just a few days until America goes to the polls and chooses its new president, while all financial markets are breathing quietly. A charged-up sense of uncertainty is playing among investors because both sides give two radically different visions about an economic plan for the nation’s future. So many stakes, and in effect, could be echoed as far around the globe with potentially far-reaching impacts across economies around the world, beyond American borders.
Gold Prices Surge as Investors Seek Safe Haven
Sino-U.S. tensions are escalating while the Middle East is on fire, investors have moved to the safety net gold. This precious metal had skyrocketed to all-time highs, reflecting the worry of many investors hedging against the unpredictable outcome of the election. The ascend of gold reminds people about the global economic fragility intensified by political turbulence.
A Surprising Trend: Stock Markets Perform Better Under Democrats
According to history, data negates the fact that the economy of the United States performs better when it is headed by Republicans. A study by two economists from the University of Chicago, Lubos Pastor, and Pietro Veronesi, indicates that in terms of GDP growth, from 1927 to 2015 under the Democratic presidents, the average was 4.86% while that under the Republican leadership stood at 1.7%. Again, the equity risk premium, a factor that allows the stock market to produce an excess return on risk-free assets, came higher at 10.9% when the power lay in the hands of Democrats.
Why the Equity Risk Premium Matters for Investors?
Why is the equity risk premium so focused as opposed to looking at total returns? The premium will wash out interest rates freely set by the central bank and, therefore, allows for a clearer picture of market performance tied directly to economic policies. The figures suggest that Democratic policies often are tied to periods within the economy when it heals. That’s something that can get risk-averse voters to the table, while also driving market growth.
Global Markets Anticipate the US Election Result
The impact of the US election is not contained within the American borders. Global markets, especially in Australia, the UK, and other major European economies, have historically been impacted by US political changes. Studies have shown that Australian stocks, for example, have generated higher equity risk premiums during Democratic administrations in the US, indicating the interlinked nature of international financial systems. The stakes are not just American; they are global.
Will a Democratic Victory Trigger Market Boom?
Rumors abound: will the Democrats’ election lead to a new explosion of markets? At least two compelling arguments exist that answer no. A victory by the Democrats this time will not represent an exchange of Republicans for Democrats. In other words, the continuation of the very same Democratic policies would materialize this time around in an election-a completely different post-crisis phenomenon that has characterized electoral processes for Clinton, Obama, and Biden. The US economy is already booming-continued job growth has hit a six-month high, while GDP has expanded at a robust pace. Without an economic crisis to fuel a risk-averse voter shift, a dramatic stock rally seems unlikely.
Short-Term Market Reactions: Expect the Unexpected
While the Democrats do better in the long-run economic outcomes, short-term market responses around election results paint a different picture. Surprise Republican victories, to be sure, have had the opposite effect of what the prediction markets predicted, as historical evidence shows temporary stock surges of 2-3%. Maybe this is because Republican-leaning fund managers may feel elated when their favorite party upsets the prediction markets.
Uncertainty Looms: Investors and Markets on High Alert
Markets will likely continue to be volatile close to the election day. Investors are ready and preparing for all possible directions since the outcome may well set the course for global financial markets. What happens the next course in the Oval Office will quite certainly have far-reaching consequences, given that the US is one of the biggest economic powers.
