Edelweiss Broking, in a detailed report on the paradigm shift of US election, highlighted that some market correction cannot be ruled out
History suggests that stock market returns are correlated with the US presidential cycle
The United States will conclude the presidential election on November 3, 2020. Owing to the ongoing COVID-19 pandemic, a record number of people have opted for postal votes. This may delay declaration of election results beyond election night. Joe Biden and Donald Trump have emerged as the lead candidate from Democrats and Republicans, respectively. Even as global financial markets and the economy have shown interesting historical correlations between Democratic and Republican rule, in either case, stock market volatility is unavoidable, say economist Ankita Pathakand and research analyst Ankit Narshanaat of Edelweiss Broking.
“In the immediate near term, volatility will remain elevated until the election outcome,” Edelweiss Broking said. In either case, Volatility (VIX) rises one month prior to the election month and remains elevated till election outcome. Another interesting fact in the report is according to the historical analysis post a crisis, the first six months of a new President witnesses a contraction in equity markets of about 10 per cent as compared to a contraction of 4 per cent for Presidents that do not follow a crisis.
Stock market returns correlated with US presidential cycle
Edelweiss Broking, in a detailed report on the paradigm shift of US election, highlighted that some market correction cannot be ruled out and one must hedge the portfolio by buying the December 2020 put option of NIFTY at 11000 levels. “To play the volatility, we recommend a Long straddle (buy NIFTY Dec 12000 CE and PE) at a spread of 800,” it said in a report.
History suggests that stock market returns are correlated with the US presidential cycle. During the term of Republicans, generally, the dollar index weakens whereas it strengthens in the Democratic tenure. Dollar weakness results in commodity outperformance over equity and also favours emerging market equities over the US. On the contrary, the growth rates, trade, employment and compensation growth have been technically higher during the Democratic rule, which eventually reflects in robust corporate profit growth. However, a stronger growth ensures stable to high inflation, reflecting in higher interest rates.
Democrats fare better for economy
According to the research firm, Democrats are more trade-friendly. Historical data proved that Democrats fared better for the economy as US imports showed an average growth of 5.8 per cent during their tenure. While in the Republican tenure, US imports registered an average growth of 1.7 per cent. Besides, corporate profits, employment and compensation growth too showed relatively better growth rates under Democrats.
Republicans appear market-friendly
On the other hand, owing to lower interest rates and easier monetary policy, Republicans are perceived as being market-friendly. Under Republicans, the dollar usually weakens which results in the outperformance of commodities over equity and emerging markets over the US.