Comment: US election impact for traders in event of a Clinton/Trump victory

By Nikolas Xenofontos, director of risk at easyMarkets

It’s no secret that traders strongly favour a Hillary Clinton presidency over Donald Trump. In fact, some financial market analysts have associated the latest gains in equities to the expectation that Hillary will prevail in November.

That’s because Donald Trump is considered to be a political (and economic) wildcard that could fuel volatility and uncertainty in the financial markets. So while Hillary certainly isn’t beloved by market participants, she is considered a safer bet to the divisive Trump.

Having said that, below is a look at what we can expect in the event of a Clinton/Trump victory.

Trump/Clinton impact for stocks

The broad consensus is that a Trump presidency would be negative for so-called riskier assets, such as stocks, because he brings a greater element of uncertainty.

While Clinton is widely expected to be the “safer” bet for stocks, pharmaceutical and healthcare companies could be rattled by another Clinton in the White House.

That’s because Hillary has pledged to curb “unjustified” drug prices. She recently lashed out over Mylan NV raising the price of its EpiPen allergy medication, leading the share price to tumble.

Impact for commodities

The immediate impact of either presidential candidate on commodities is less clear. While both Clinton and Trump have vowed to reshape the oil and gas sector, those efforts could take time to materialize.

A Clinton victory may lead to a short-term pullback in oil prices, given that she has pledged to tackle hydraulic fracturing, the main driver of the US shale boom.

This doesn’t mean that Trump would be any better for energy prices.

His pledge to build a 2,000-mile wall along the Mexico border doesn’t exactly inspire confidence in the prospect of US energy exports.

Another thing to consider is the impact of a Trump presidency on safe haven commodities, such as gold and silver. In the world of finance, uncertainty breeds risk aversion, and risk aversion makes haven assets such as gold more attractive.

Analysts already expect gold prices to reach $1,400 a troy ounce by the end of the year. A Trump victory in November could accelerate those gains.

The forex market

The foreign exchange market is impacted by several interrelated fundamental and technical forces. Chief among them is central bank policy.

The performance of the US dollar has waned this year as the outlook on a Federal Reserve rate hike has diminished significantly.

The pace and timing of the Fed’s next rate adjustment is weighing heavily on the dollar and will continue to do so regardless of who is elected president.

That being said, Trump has expressed the downside of a stronger dollar, especially in his musings about how to compete against China.

“I love the concept of a strong dollar, in many respects obviously I like a strong dollar,” Trump told CNBC earlier this year. “While there are certain benefits, it sounds better to have a strong dollar than in actuality it is.”

For those keeping tabs, it’s extremely rare for a presidential candidate to publicly talk down the dollar. That’s probably why the more politically established Hillary Clinton has shied away from making any direct statements about the dollar.

Democrat versus Republican presidents in History

Regardless of who you’re cheering for in November, history clearly demonstrates that the financial markets perform better under Democrats than Republicans.

This doesn’t necessarily mean that Democrats are better for the markets – after all, presidents spend a considerable amount of time dealing with decisions of previous administrations.

But it is a historical fact that must be taken into consideration.

Since 1900, the Dow Jones Industrial Average has enjoyed an average annualized return of 7% under Democratic leaders versus only 3% under Republicans. Democratic presidents Barrack Obama and Bill Clinton enjoyed significantly higher returns.

A separate study of the S&P 500 since 1929 reveals a similar pattern: average annualised returns during four-year Democratic terms is 10.83%, compared to a meagre 1.71% under Republicans.

Traders are definitely aware of this phenomenon, and could use it as another reason to cheer on Clinton in November.

Nikolas Xenofontos, is a director of risk at easyMarkets.

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