On the 3rd of November 2020 Americans will be called to the polls to cast a vote for the next U.S. president. This political event is of worldwide scale and will have a major impact on the financial markets. Whether it’s the Republican Donald Trump who will lead the US for another four years, or the Democrat Joe Biden, the markets are bound to be unstable for the upcoming election period.
What happens to markets during elections?
According to the Presidential Election Cycle Theory, developed by Yale Hirsch and first published in 1967, just before the election presidents tend to shore up the economy to increase their party’s chances of being re-elected. Because of that, major stock market indices are likely to increase before each election. However, the theory is susceptible to events, just like COVID-19, which could affect investors’ behavior. Also, the time before the election of a new president, is characterized by uncertainty. This is because issues related to the country’s national economy, judicial system and the general direction it’s heading towards take center stage. Traders and investors don’t like uncertainty in the marketplace and they might behave in unpredictable ways.
Key US Election Dates to watch
BEWARE: The markets could be affected by the US Election 2020 and could be volatile until the presidential inauguration on the 20th of January, 2021.
The Covid-19 Effect
The COVID- 19 pandemic has affected the whole world and the U.S. has been no exception. The country is now facing severe economic repercussions and increased social unrest. Along these dramatic consequences, COVID-19 will also play a major role in the election outcome and will continue to affect the US economy after the presidential election.
Effect on Gold
Despite the uncertainty looming over the election outcome, one thing is for sure, the election will affect the price of gold.
When you take a closer look at the history of the yellow precious metal, there is a discernible pattern between the price of the commodity and the time around the US election campaigns. The price of gold increases during the entire election year.
However, the new all-time high gold reached in August 2020 could be attributed to the COVID-19 pandemic rather than the election period. During times of uncertainty, investors turn to the safe-haven asset to hedge their portfolios.
Nevertheless, it’s still worth studying the US. Presidential election historical patterns and trends before you trade CFDs on gold this year.
Effect on USD
The post-election price of the US dollar is harder to project this year as except for political uncertainty, the COVID-19 pandemic sparked social unrest.
Let's have a closer look at the arguments behind the strong vs weak USD discussion.
STRONGER USD
Some major banks are projecting the USD to raise in value compared to other major currencies by the end of 2020. Their prediction is based on the following factors: the belief that the US economy will lead the COVID-19 global recovery, the fact that political risks could be mitigated after election day and hopes that the Fed will loosen its tough QE policies.
WEAKER USD
Some market experts believe that the USD could decrease in value whatever the outcome of the 2020 election. Heightened civil unrest could be the defining factor overpowering the announcement of the new president and driving the price of USD down.
How to Trade the US Election
Markets love volatility and trading the elections could potentially bring on extraordinary trade opportunities and gains. However, this is a “risk on” period and the potential for loss is also great. Follow these best practices to ensure you make the most of trading the US election.
Have a trading plan
Build your trading plan around the markets' unique conditions and stick to it. No matter what.
Follow the elections news
Stay up to date with current events and study their possible effects on the US economy.
Manage your risk
Only trade a percentage of your funds and put stop-losses to avoid draining your account.
Hedge your portfolio
Protect your portfolio against potential loss with a thoroughly planned hedging strategy.
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