The US Election - Debating the Asset Market Impacts

With the US election just around the corner, uncertainty hangs over the financial markets and how different asset types will react to a win on either side.

Investors are keenly analyzing the platforms of each candidate, dissecting potential policy changes and their possible impact on various asset classes.

USA Election 2024

The US election is still almost six months away, set to take place on the 5th of November 2024.

Voters will elect a president and vice president for a term of four years, with current President Joe Biden, a member of the Democratic Party, running for re-election and his predecessor Donald Trump, a member of the Republican Party, running for re-election for a second, non-consecutive term.

When it comes to debates, in May, both Biden and Trump accepted an invitation from CNN to participate in a debate on June 27, 2024, as well as an invitation from ABC News to participate in a debate on September 10, 2024.

Key US Government Policies On The Line

Analysts at Goldman Sachs said in a note Thursday that the first debate, now scheduled to take place in less than a month (three months earlier than usual), may increase focus on the election and provide fresh clues as to how the market is viewing its impact on asset markets.

“We focus on the likely impacts from shifts in fiscal, tax, and trade policy. Unified government control is likely to generate the most positive fiscal impulse, while divided government is likely to lead to more fiscal restraint—but in all scenarios, the likely fiscal effects in each scenario are much smaller than in 2020, and so the market’s potential reaction to proposed tariffs may be the biggest swing factor,” says Goldman Sachs.

How Will US Markets React

Goldman Sachs’ baseline scenarios predict a modest rally in equities, higher yields, and USD strength in a Republican sweep. Meanwhile, if there were a Democratic sweep, it would expect a modest equity downside, higher yields, and USD weakness.

In a Trump win but a divided government outcome, Goldman sees modest equity downside, slightly higher yields, and USD strength. On the other hand, in a Biden win and divided government outcome, they forecast equities flattish, lower yields, and USD weakness.

However, the bank cautions that if fiscal proposals wind up being larger or the market reacts more intensely to tariff proposals, then these outcomes could be quite different.

“Other potential policy shifts that we do not explicitly consider here (geopolitical tail risks, Fed risks) may also broaden the asset impacts,” says Goldman Sachs. “Given the uncertainty around these reactions, a Republican sweep may not reliably follow the asset footprint seen in 2016.”

Will The Election Affect USD?

Overall, the bank still sees a stronger USD as the most reliable impact of a potential Republican victory “because it is the most consistent response to tariff risks.”

“Higher yields are more likely in either ‘sweep’ outcome than in divided government outcomes,” says Goldman. “Because FX and rates impacts vary across different potential risk scenarios positioning for deep equity downside directly may still offer the most efficient protection for long risk portfolios.”

What Should US Investors Do?

Overall, Goldman Sachs' baseline estimates do not strongly support hedging equity exposures, but they state that scenarios could generate more significant equity pressure.

As of now, they believe the challenge for positioning for or hedging against election outcomes is that the election itself is still some time away.

However, it is felt the market focus could pick up ahead of that point. “Volatility in many parts of the market remains quite low by historic standards, and even lower still ahead of the October/November period,” says the investment bank.

“We think that presents opportunities to look at positioning for increased focus in the election through the summer and beyond.”

How to stay on top of the Dollar/Pound Cross

There’s likely to be plenty to keep an eye on as the USD to GBP currency cross movements continue to play out. Thankfully, with the interactive charts and historical currency info available right here on investing.com, investors can keep up with live data