Super Tuesday redefines the US political landscape but markets remain unfazed
Hillary Clinton has emerged as the frontrunner for the Democrat presidential nomination after Super Tuesday, and for the Republicans Donald Trump has taken what appears to be an unassailable lead among GOP constituents. The uncertainty of the current presidential politicking does not however seem to have percolated through to the markets just yet.
Once the nominees have been selected and their positions have been made clear, each of the candidates’ policies will have a much stronger impact on market movements. The candidates’ stances on trade policies, foreign policy, social welfare programmes, corporate taxation, personal taxation, healthcare overhauls and government expansion may weigh heavily on market sentiment.
The race for the White House
Republicans now assume a three-man race with the inclusion of Marco Rubio, but the Florida senator is lagging in polls and only managed to pick up Minnesota on Tuesday. By the end of the evening, Donald Trump had 316 delegates, Ted Cruz 226 delegates and Marco Rubio 106 delegates. Trump has won 10 states, Cruz four states, and Rubio one state. To win the Republican nomination, 1237 delegates are needed.
For the Democrats, Hillary Clinton is ahead with 1034 delegates and Bernie Sanders trailing with 408 delegates. Clinton has won 576 delegates and 457 superdelegates, while Sanders has won 386 delegates and 22 superdelegates. To win the nomination, 2382 delegates are required.
How are markets likely to react once candidates have been selected?
Markets do not react well to anxiety or uncertainty. While traders expect the mudslinging contest to continue unabated right through until the president is elected, market movements will become more pronounced as the sand in the hourglass runs out. For now, market participants are largely enjoying the sideshow and going about their trading business focused on the most important economic issues including:
- Economic policies in China (China slashed capital reserve requirements by 50 basis points for banks)
- OPEC/non-OPEC agreements to limit crude oil production to raise prices
- Bank of Japan interest-rate decisions
- European Central Bank quantitative easing policies to drive economic activity
- The UK referendum scheduled for June 23 on the issue of a UK exit from the EU
There is a wealth of data describing the behaviour of markets during presidential election cycles. Typically markets are characterised by high volatility in the year that a new president will be elected. Meanwhile minimal returns are expected across major averages with a newly elected president, owing to uncertainty regarding the domestic and global economy.
From Super Tuesday through to the elections in November, markets are likely to see significant sideways movement with choppy trading and uncertainty. The theory suggests that three-month returns of indices like the S&P 500 prior to an election often dictate whether the incumbent party will remain in the White House. If the S&P 500 index rises, this bodes well for the incumbent party, while a decline bodes well for the other side. This type of data will be available between July and October of 2016.
You should always bear in mind however that the connection between election cycles and the behaviour of stock markets is a transient and spurious one; trading and investment decisions should always focus on the fundamentals of the economy whatever they may be. For 2016, the issues remain deflationary pressures, negative interest rates, crude oil price weakness (spurred by oversupply and weak demand), structural weakness in China and emerging market economies, and a rampant US dollar.
These are the major drivers of trading activity, while politics drives speculative behaviour for a shorter period of time. Traders are advised to focus on the basics such as portfolio diversification, risk management and the timing of trades. In the present election cycle the ‘Trump Phenomenon’ may indeed generate substantially more interest than normal, but the correlation between that and market-related activity is not entirely quantifiable.
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The content of this article is the personal opinion of the author and not Intertrader Direct. The information and comments provided herein under no circumstances are to be considered an offer or solicitation to invest. Nothing herein should be construed as investment advice. The information provided is believed to be accurate at the date the information is produced.