Financial markets tend to become erratic as polling data, debates and breaking news affect market sentiment

By Nigel Green

With the US presidential election fast approaching, investors are facing a heightened sense of uncertainty.

As markets react to the political shifts and speculations that surround election season, many are tempted to take advantage of potential market swings in hopes of quick profits.

However, trading an election, especially one as unpredictable as this, comes with significant risks that could lead to substantial losses. While the allure of profiting from short-term market movements may be strong, the dangers involved in election-driven trading should give investors pause.

One of the primary risks associated is extreme market volatility.

Financial markets tend to become more erratic as polling data, debates, and breaking news affect market sentiment.

This heightened volatility can lead to dramatic price swings, and the reality is that market reactions are often far from predictable.

In past elections, markets have defied expectations, catching many traders off guard. In the 2016 US election, for example, many predicted that a Trump victory would lead to a significant market sell-off. However, the opposite occurred as markets rallied sharply after his win, leaving those who bet on a downturn facing steep losses.

This unpredictability highlights one of the key dangers of election trading: political uncertainty can overshadow market fundamentals.

During an election, investors often find themselves reacting to political headlines rather than focusing on a company’s underlying business performance or long-term value.

This can result in impulsive decision-making, where people abandon carefully considered strategies in favour of short-term trades based on speculative scenarios.

Yet, the political landscape can change rapidly, and the policies proposed during a campaign often take time to be implemented – if they materialize at all.

Legislative gridlock, a divided government, or shifting priorities can prevent key policies from being enacted, which means investors who trade based on expected political outcomes may be left waiting far longer than anticipated for their investments to pay off.

Adding to the complexity is the fact that polls and predictions are frequently wrong.

Relying on polling data as a basis for making trades is a risky endeavour. The US 2016 election and the Brexit vote are stark reminders of how polls can mislead investors.

Despite widespread confidence in a Clinton win, Trump’s victory came as a shock to many, leading to unexpected market reactions. Political polls can swing wildly in response to short-term factors like debates or scandals, but these swings don’t always reflect the broader electorate’s eventual choices.

The temptation to use leverage – borrowing money to increase the size of a trade – during these periods of volatility is another danger. Leverage can amplify both gains and losses, making it a particularly risky strategy when markets are unpredictable.

A single wrong move in a highly volatile environment can wipe out an entire investment, or worse, trigger margin calls that force investors to sell at a loss. For those less experienced with managing risk in volatile markets, the use of leverage can turn what might have been a manageable loss into a financial disaster.

Trading on emotion during election periods is yet another pitfall.

The constant media coverage, the stakes involved, and the volatility of the markets can create a high-stress environment, leading to emotional decision-making.

When investors trade based on fear or excitement rather than rational analysis, they’re more likely to make mistakes. This emotional rollercoaster can also cause investors to lose sight of their long-term goals, making reactive decisions that undermine their overall investment strategy.

Even after the election results are known, uncertainty doesn’t necessarily fade either.

The ability of the winning candidate to implement their proposed policies depends on many factors, including the composition of Congress and the broader economic environment.

Those who expect immediate policy changes might be disappointed to find that legislative delays, compromises, or gridlock prevent significant reforms from taking place.

Investors should approach election season with caution, maintaining focus on their long-term strategies rather than being swayed by short-term political noise.

(Author is deVere Group CEO and Founder)

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