Will markets catch a cold from US election fever?

Considering the belief that the rest of the world catches a cold when the US sneezes, many investors are wondering if markets will catch a cold from the United States’ (US) election fever.

Kar Yong Ang, an Octa analyst, says while the US election’s influence over the markets may be temporary, the excitement and uncertainty surrounding elections can lead to emotional and illogical behaviour, contributing to market swings.

“And since emerging markets like South Africa are often the recipient of the ripple effects originating from the US, understanding how the election outcomes could affect the South African economy is essential to successful investment and trading.”

As we approach 5 November when American voters will go to the polls to elect their new president, Octa, a global online forex broker takes a look at the likely impact of election fever on financial markets and how investors and traders can navigate the growing market volatility over the coming weeks.

ALSO READ: US election: short-term volatility in global markets a given – economist

Candidates and their key policies

American voters will choose between Kamala Harris, the Democratic nominee and former president Donald Trump, the Republican nominee.

Ang points out that Harris backs significant fiscal stimulus measures, such as student debt relief and wants to move the US economy away from fossil fuels and towards cleaner energy sources.

“Former president Trump’s previous administration was characterised by tax cuts, deregulation and a focus on trade policies. During the 2024 campaign, Trump repeated his intention to cut red tape, reduce government spending and bring inflation down.”

Market implications for stock, the dollar and gold

Ang says it is important to note that the impact of presidential elections on financial markets can be short-lived, with markets usually stabilising as the new administration’s policies become clear.

However, he says there are distinct differences in the expected outcomes for the stock market, dollar and gold prices depending on who is victorious in November:

ALSO READ: US election’s impact on SA minimal, experts say

Implications for the stock market

“Obviously, investors will react to the perceived economic agendas of the candidates, leading to fluctuations in stock prices, but right now they are more focused on corporate earnings and potential interest rate cuts by the Federal Reserve.”

He says a Trump victory will likely be a boon for energy stocks, especially for those involved in fossil fuel production, as well as manufacturing, pharmaceuticals, biotech and tech companies that are not overly reliant on international supply chains.

“Conversely, if Harris were to win, companies in the renewable energy sector, infrastructure companies, healthcare providers and companies with strong diversity and inclusion initiatives are likely to perform well.”

Implications for the US dollar

Neither candidates provided specific details about how they intend to tackle the huge debt that the US accumulated over the past years, Ang says.

“However, a Harris administration might prioritise increased government spending on social programmes, healthcare and infrastructure, which could lead to larger budget deficits and increased borrowing, putting downward pressure on the dollar.

“Generally speaking, the market views Harris’ victory as bearish for the US dollar.”

He says a Trump victory on the other hand could renew focus on protectionist policies that may strengthen the dollar in the short term due to reduced imports and a lower trade deficit.

“However, if global trade tensions escalate, it could also lead to long-term depreciation. In the short term, the market views Trump’s victory as bullish for the dollar but the longer-term outlook is less certain.”

ALSO READ: Why the sudden shine in gold again?

Implications for gold

Regardless of who wins the elections, Ang says the gold price will likely be the one clear winner. “It is not so much the policies of the actual candidates that are bullish for gold but the sheer fact that the elections are taking place that is bullish.”

He says a Harris victory might be perceived as a shift towards more progressive policies, which could include increased regulation and higher corporate taxes. These changes could create volatility in the stock market, leading investors to flock to gold as a more stable investment.

“Additionally, if Harris’s policies lead to a weaker US dollar, this could further boost gold prices. Gold is typically inversely related to the dollar: when the dollar weakens, gold prices usually increase.”

Ang says one potential outcome of Trump’s victory is that it could lead to increased geopolitical tensions and trade uncertainties. During his previous term, Trump’s administration engaged in trade wars, particularly with China, which created economic uncertainty.

“Because gold is considered to be a safe-haven asset during times of geopolitical instability, heightened tensions could drive investors to flock to gold, pushing its price higher.”

Whichever candidate wins, Ang says traders and investors are advised to navigate potential volatility by focusing on safe assets like gold, diversifying their portfolios and keeping a close eye on developments in the US in the coming months.