How will the US election results impact the Indian stock market?
Finance x Politics
We know that fundamental changes in Wall Street directly impact the market trends in India. With the US election results expected to be out in the first half tomorrow, the markets are gearing up for a big move. Should you hold on to your stocks or sell them off? Is it a good time to buy calls or puts? Let’s discuss.
Possible Scenarios
There are two candidates in the race to become the President of the United States. Both of them have conflicting ideologies that will directly impact the nature of the markets. There are three possible scenarios after the elections on November 3:
Donald Trump is chosen as the POTUS again
Joe Biden brings Democrats back to power
No clear winner
If Donald Trump wins
If Trump comes back to power, the market indices (in the US and in India) are likely to see a sharp bullish* move in the short term. Trump is known for his capitalist approach towards the economy- his infamous move to not implement a complete lockdown in the US even when the coronavirus cases were surging is a direct reflection of his thought process. His first priority is the economy.
Even in the middle of the pandemic, we saw NASDAQ and S&P hit all time highs breaking the $12k and $3.5k barriers respectively. The news of Trump getting infected with coronavirus sent Dow Jones tumbling down.
*Bullish = Increase in price of a contract | Bearish = Decrease in price of a contract
Did you know?
After Trump came to power, US indices saw 33% rise in 702 trading days since the election win- the highest among Clinton, Obama and Bush (who saw 30% fall). This was called the Trump Bump.
If Joe Biden wins
If Biden comes to power, the initial push would be downwards for global markets. Biden’s outlook is less capitalist and he is an advocate of prioritising human lives over the economy. However, in the medium term, Pharma and IT sectors might surge as Biden is vaccine and immigration friendly.
Also, Trump has created an aura of panic where his tweets impact the markets heavily. He has already tweeted that Biden’s victory would push the markets for a free fall.
No clear winner
Trump has repeatedly called out that mail-in ballots aren’t accurate and if he loses, he will not accept the results and will take the matter to the Supreme Court. Markets never react well to confusion and might go into a bearish frenzy if this happens.
What do you do as a trader?
Since we don’t know for certain who will come to power, there’s no certain strategic move we can make. However, it might be a good idea to create a strategy of buying both calls of higher strike prices and puts of lower strike prices since we’re expecting a big move in the short term in either direction. If you’re holding an equity portfolio, our recommendation would be to sit tight and not make a lot of entries/exits. Quarterly results for Indian firms have been encouraging and once this confusion ends, we might be in for a big bull move.