Elections and Markets: An Unbreakable Bond

Why do elections have a hold on markets, and how will this November affect trading?

With the US election fast approaching, we’ve been considering the effect it will have on the global markets, and asking ourselves why?

Why do elections have such a hold on the markets, and what effect can we expect them to have on trading this upcoming election?

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Politics & Markets: The Ties that Bind

Politics and economy have been bosom buddies for centuries. A quick walk down history lane reveals that even before the digitized financial markets we know existed, the word ‘politics’ was linked to the word ‘economy’.

Political-economy originated in the 18th-century, from the study of moral philosophy.

By the 19th century, people were referring to the study of political-economies as simply economics.

Economics began morphing into the study of predictive, mathematical analysis models, but even as these changes in the field were continuing, the bond between politics and economy was strong and still is today.

Politicians everywhere in the world have the power to make policy decisions that affect markets and industries.

And it goes without saying that presidents, parties, and politicians are all affected by the economy’s performance, especially during elections.

Historically, when the economy is up, people tend to vote for the same candidate or party in office. When times are tough, they will tend to cast their vote for a change.

Similarly, markets are still affected by the politicians who take office and the short and longer-term impacts of their policies.

Economics today may sound like it’s its own area of expertise, and so is politics, but the two are still inextricably linked.

Political scientists may theorize by examining political events and economists may make predictions by examining economic issues.

Still, many scholars correctly insist on approaching both social and economic policy by taking political-economies, and their relationship, into account.

How to Trade during Elections

Seeing as political-economies are still alive and well, it is smart to look at elections through the lens of the economy, and economy from the political lens.

Traders and investors who make money on the financial markets do so by observing market patterns and trends and use them to try to predict if prices and market value are going up or down in the short or long term.

This is especially true during elections, although, with the volatility, predictions get harder to make.

A good way to decide on the investments is to make it look at market patterns and trends in relation to a variety of factors:

  • Policies: What economic policies the candidates are proposing and what effect will they have on the markets
  • Public sentiment: Which candidate is the favorite, and what’s the likeliness of one of the candidates to win over the other
  • Party performance: Likeliness of one party to win over the other
  • Past election statistics: Analysing past elections and their effect on the markets

One approach is to invest in industries that may benefit from upcoming policy changes. Take the case described by LPL senior market strategist Ryan Detrick.

In Nov 2016, with the Dow’s “nine-day losing streak directly ahead of the election”, the price of copper—which investors viewed as a “President Trump infrastructure play”—increased for a record 14 days in a row.

And that is why at Axiory we’re watching the upcoming US election so closely. There are opportunities to benefit from market volatility by making smart trading decisions.

Follow up on the elections and prepare your risk management strategy with Axiory.

Disclaimer: The content of this article is sponsored and does not represent the opinions of Finance Magnates.

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