Why Political Disagreement Could Lead to Market Volatility
Will the election be a source of volatility? Obviously, to the extent the consensus of a Clinton win is wrong, there will be a reaction. However, once you get past the shock of a non-consensus event, markets often settle down (think of Brexit). Even if elected, will a Trump administration be able to enact many of the policies he has proposed? Given the number of seats the Republicans need to defend, absent significant coattails the Republicans may wind up losing the Senate even in the unlikely event of a Trump victory.
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Market Realist – Uncertainty will likely prevail…
Markets respond far better to election processes whose outcomes are more predictable. With Clinton marginally leading the presidential poll tracker over Trump, the consensus estimates that Clinton will win. But anything can happen between now and election day. We’ll likely see some volatile (VXX)(XIV) movements if the consensus proves untrue.
With President Obama not running for re-election, regardless of the president’s party or political leanings, departing two-term presidents create a void that financial markets typically find unnerving. This apprehension might raise uncertainty, and markets could be in for a bumpy ride all the way through the November 2016 election.
Market Realist – But then uncertainty should settle down
However, as CFA Russ Koesterich said above, markets often settle down after the shock of a non-agreement on certain political or financial event. For example, on June 24, 2016, when the United Kingdom voted to leave(or Brexit) from the European (EZU) Union, it wiped out $2 trillion from the world (ACWI) markets while the pound sterling suffered a record one-day plunge to a 31-year low.
Along with a fall of 3.1% in FTSE 100, global market indices like the S&P 500 Index (SPY)(IVV)(VOO) and the Dow Jones Industrial Average (DIA) fell 3.6% and 3.4%, respectively, after the Brexit vote. In addition, emerging markets (EMB) like India’s (EPI)(PIN) BSE Sensex tanked 604.5 points or 2.2%. Post–Brexit vote, markets gained momentum and plunged back sooner than expected.