Free Essay Discussing the Effect of Presidential Election on Financial Markets

Americans go to the ballot after every four years to vote for their preferred choice of president. Election periods always tend to bring out the emotional side of voters, and therefore they can lead to despair or excitement depending on one's expectations. This sense of uncertainty causes election years to display lower market returns than the years before and after the vote. The 2016 election ended with Trump as president for the next four years, and this is going to have an impact on the financial markets

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There is likely to be considerable market volatility as investors come to terms with a Trump presidency. He has talked of imposing tariffs on imports, deregulation, and tax cuts among other moves aimed at 'making America great again.' It is true that markets do not like uncertainty (Holodny). According to the market, Hillary would continue with the known policies of the previous government. However, Trump and his unorthodox economic positions would cast a cloud of uncertainty in the market (Holodny). In 2016, Jack Lew, the Treasury Secretary, was concerned that a Trump presidency could cause a black swan moment. It is a term used on Wall Street to describe a highly unexpected situation that thrusts the economy into the unknown (White). The Treasury Secretary premised that the unpredictability of the president, coupled with his limited governing experience, could upend the global markets thus making a case for emergency government intervention (White). Many investors will be wary of the political risk posed by the president, and some sources had predicted a 7% drop in the S&P 500 if he wins.

Research conducted by Credit Suisse showed that stocks often bounced back after the initial shock of geopolitical events subsided (Holodny). These individual events affected major stock markets by about 10% with the effects being reversed in nearly a month (Holodny). Global financial markets had plunged and then recovered following Trump's election victory. Futures on the S&P 500 had fallen by 5% and the Mexican peso- a key indicator of investor sentiment- plummeted by 12% to a record low (Sturm). The immediate aftermath of the election affected the stock markets negatively as stock market brokers adjusted to the different election result. However, there are other factors, such as China's currency devaluation and oil-price shocks, that affect the stock market but are unrelated to the policies of any president. Therefore, some investors will be actively buying during this period as risk-averse investors keep away and dump their stocks. The Dow Jones and S&P 500 were up by half a percent at around noon the next day after the results were announced (Sturm).

The commonly held stereotype in America is that Republican candidates are good for the markets since they often tend to push for pro-business policies such as less regulation and low taxes. The market may turn bullish and buy US stocks since the president's policies are conducive for the business community. The early market reaction is a good predictor of the stock market condition in the near future (Sturm). The upturn in stock after Trump's election means that people have come to terms with a Trump presidency, and it reflects the trend of the next four years. Markets are still moving higher in 2018 with the Dow pushing into positive territory despite all the noise emanating from Washington (Monica). Companies are using their stock to finance buyouts

Conclusion

The effect of the presidential election on the stock market over the next four, or eight years, could be positive. The initial fall in futures and the Mexican peso were caused by the uncertainty in the market posed by the political risk of an unpredictable president. The financial markets quickly recovered as stock market power brokers adjusted to the new regime. The stocks have been bullish, and the trend is likely to continue over the next four years.

Works cited

Holodny, Elena. Elections and The Stock Market: History Tells Us Economics Matter More Than Politics. Could it be Different this Time? Business Insider, 15 October. 2016, www.businessinsider.com/what-happens-in-the-stock-market-after-us-elections-2016-9?IR=T. Accessed 27 Oct 2018.

Monica, Paul. Investors Still Bullish On US Stocks and Economy. CNNMoney, 4 June. 2018, money.cnn.com/2018/06/04/investing/stocks-earnings-economy/index.html. Accessed 27 Oct 2018.

Sturm, Ray. The Swing of Financial Markets After Donald Trump'S Victory is a Strong Indicator of What's to Come. Quartz, 9 November. 2016, qz.com/832964/election-2016-how-financial-markets-reacted-to-donald-trumps-victory-and-what-it-predicts/. Accessed 27 Oct 2018.

White, Ben. Why Isn't Wall Street Freaking Out About Trump? Politico, 3 August. 2018, www.politico.eu/article/donald-trump-white-house-news-wall-street-financial-markets/. Accessed 27 Oct 2018.