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The US election and your investments

Published: 25 October 2016

No sooner had UK investors absorbed the outcome of the summer’s EU referendum than another source of uncertainty appeared on the horizon.

The upcoming US presidential election comes on the heels of an EU referendum that posed a real test for the nerves of investors.

Markets may have been more resilient after the Brexit vote than many had expected, with the FTSE 100 rising to record highs in October, but they never like uncertainty. Some £5.7 billion was withdrawn from UK-based equity funds the month after the referendum for example, with corporate and government bonds, seen by investors as less risky, among the beneficiaries.

But many also saw an opportunity. Trading through Alliance Trust Savings was exceptionally busy in the days immediately following the referendum, with three quarters of those trading choosing to buy.

Trump vs Clinton

Could there be a similar reaction after the US election on 8 November? National elections are a natural source of uncertainty - at least where the result is in question - and the US contest falls firmly into that category.

Republican candidate Donald Trump and Democrat Hillary Clinton offer a contrast, not only in terms of personality and style, but also their policy platforms.

While Trump favours cuts to spending and individual and corporate taxation, Clinton has proposed raising taxes on high earners, increasing the minimum wage and introducing tax reliefs for middle earners. The challenge she would face, however, is getting those plans through a Congress still controlled by Republicans, raising the prospect of a policy stalemate.

Trump has suggested he would be more protectionist of US interests internationally, with likely implications for the global economy. Christine Lagarde, head of the International Monetary Fund, has warned that anti-trade policies “would certainly have a negative impact on global growth".

How might markets react?

Researchers at Oxford Economics have estimated that a Trump victory would wipe 5% of US GDP over the next five years, taking a huge chunk off the forecast size of the US economy in 2021. A similar warning was issued in August by researchers at CitiGroup. They suggested that a Trump win would “deliver a shock” to financial markets, albeit possibly a short-lived one.

CitiGroup added that "tightening financial conditions and further rises in uncertainty could trigger a significant slowdown in US, but also global growth”.

The result is that a Clinton win could be seen as the more benign outcome and therefore a relief to financial markets. Citigroup also noted that whoever wins the election, the policy changes that invariably follow could offer a “major fiscal boost”, whether because of infrastructure spending launched by Clinton or perhaps tax cuts introduced by her rival.

In theory, fears over the ramifications of a Trump victory should be priced into markets ahead of the election, should investors believe that is the likely outcome.

Research suggests that US stock markets perform better when the Democrats are in power. The Dow Jones Industrial Average has returned an average of 82.7% under Democratic presidents, compared to a 44.8% average during Republican tenures, according to research by the Bespoke Investment Group.

Once the election is done, there may also be an impact on US interest rates. The US Federal Reserve has historically been reluctant to change rates immediately prior to an election, and with an expected summer rate increase not materialising in the end, it seems that if there is another hike in the pipeline, it could come in the months following the election.

Focus on the longer-term

But while there’s evidence that markets can be influenced by the outcome of elections and even stages of the Presidential cycle, they probably shouldn’t be a basis for major investment decisions. External factors such as inflation and interest rates are likely to have a bigger influence on the economy, while individual decisions should always be based on individual circumstances, requirements and risk appetite.

As with the EU referendum, there may be short term opportunities for those willing to take the risk. If that’s for you, it’s about doing your research, weighing up the views of different market commentators and understanding where those opportunities may come from.

The key for long-term investors though, as always, is to keep focused on the long-term. The ups and downs in markets driven by events like elections should be smoothed out over time.

Remember the benefits of regular investing

Regular investing plays a big part here. Drip-feeding your investments can potentially smooth out some market volatility, due to the effect of pound-cost averaging. This is what happens when your money buys units at different times rather than at one price, which means that you buy more when prices are low and fewer shares are purchased when prices are high.

So not only does regular investing offer some protection against short-term market shocks, but the pound-cost averaging effect can potentially make a difference to your investment growth over the long term.

An opportunity to consolidate?

Times of uncertainty may also offer a good opportunity to make sure your investments are well positioned for the long term, and that they still match your risk appetite. This is made much easier when your different investment and pension accounts are held in one place.

If they’re not, consolidating them onto one platform could be a far more productive step than fretting over the outcome of an election that – if you’re investing for the longer-term - should ultimately have little real impact on your portfolio.

US Elections

Important information

These articles are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice. Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.

Your existing pension may have valuable benefits which you might lose when you transfer.

Laws and tax rules may change in the future without notice. The information here is our understanding in October 2016.This information takes no account of your personal circumstances which may have an impact on tax treatment.

Past performance is not a guide to future performance.

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Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.