Elections and the Stock Market

2024-10-23

US Presidential Elections and Stock Market Turbulence

On November 5, 2024, American citizens will go to the polls to elect their next president. In a nation more polarized than ever, this election promises to be not only historic but also potentially disruptive for financial markets. Investors, both American and international, are preparing for major turbulence. A victory for Kamala Harris, in the context of a close race, could provoke violent reactions from Donald Trump’s supporters, ready to contest the legitimacy of the result. Conversely, a Trump victory could lead to reprisals against his Democratic opponents and threaten the American democratic balance. In this context, what can investors do to navigate the political and economic uncertainties ahead? The history of US elections shows us that unexpected or contested results have often had direct repercussions on financial markets. Let’s examine some key historical examples:

2000 Election: George W. Bush vs. Al Gore

The 2000 presidential election is perhaps one of the best examples of how electoral uncertainty can disrupt markets. The close race between George W. Bush and Al Gore led to a weeks-long legal battle over a recount in Florida. During this period of uncertainty, US stock markets experienced significant volatility. The Dow Jones Industrial Average of 30 leading US stocks fell by nearly 5% between election day and the final announcement of the results in December. Investors feared an institutional crisis, exacerbating the volatility. 2016 Election: Donald Trump’s Surprise Victory The 2016 election of Donald Trump is another notable example. Few analysts had anticipated his victory, and the initially surprised markets reacted with a sharp decline. On election night, when I couldn’t sleep, Dow Jones futures plunged more than 800 points as Trump appeared to be winning. However, once his pro-business agenda, focused on tax cuts and deregulation, became more widely understood, the markets quickly recovered. In less than 24 hours, the losses were erased, and a stock market rally began. But the instability stemming from his administration’s unpredictable management has maintained constant volatility. These two examples clearly demonstrate that electoral uncertainty, especially when the results are contested or unexpected, can cause immediate shocks in financial markets.

The 2024 Scenario: A Highly Polarized Election

The situation in 2024 is even more complex and could lead to unprecedented disruptions. What would happen if Kamala Harris won in a close race? Donald Trump’s supporters, still convinced that the 2020 election was “stolen” from them, may refuse to accept the result. Massive demonstrations, even violent riots, could erupt in American streets. Some also fear that certain pro-Trump militant groups might take even more extreme measures to challenge the government. Such a situation could plunge the country into chaos and institutional instability, exacerbating investor fears.

Conversely, a Trump victory could be seen as an attempt to consolidate power. Having already faced two impeachment proceedings, as well as multiple legal investigations, Trump might seek revenge against his Democratic opponents. The reforms of his second term could aim to weaken democratic institutions, strengthening his personal control over the workings of the state. For financial markets, this kind of scenario could be reminiscent of certain declining democracies, where leaders accumulate power at the expense of institutional checks and balances. Such political instability is rarely favorable to long-term investors.

The potential impact on stock market indices

Markets often react negatively to political uncertainty, and the outlook for 2024 is hardly optimistic. If social or political unrest erupts following the election, investors could flock to safe-haven assets such as gold or government bonds, while riskier equities would come under downward pressure.

The sectors most likely to be affected are those heavily dependent on government policies. For example, the healthcare sector could be shaken by healthcare reform proposals under a Harris presidency, while the energy industry could be impacted by geopolitical tensions and international sanctions if Trump decides to reorient his foreign policy.

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What can investors do?

Faced with this uncertainty, several strategies are available to investors to protect themselves or, at least, mitigate the negative effects of a contentious election:

1. International diversification Investing in foreign markets can offer protection against internal political risks in the United States. Emerging or European markets could benefit from American uncertainty, attracting capital seeking stability.

2. Favoring safe-haven assets Historically, gold, government bonds, and currencies such as the Japanese yen or the Swiss franc have served as safe havens during periods of political turmoil. Increasing exposure to these assets could help limit losses in the event of stock market volatility.

3. Reassess risk tolerance Investors should review their risk tolerance before this election. Those who cannot tolerate volatility might consider reducing their exposure to US stocks or sectors most affected by government policies.

4. Use hedging options Derivatives such as put options allow investors to protect themselves against a decline in stock prices. This can be an effective strategy for those who want to maintain equity exposure while limiting potential losses. The 2024 presidential election represents a crucial turning point for the United States, and investors should expect significant turbulence. By preparing now and diversifying their strategies, they can navigate this period of uncertainty with greater peace of mind.