US election playbook: tactical insights from the CMC team

As the US election rapidly approaches, traders and investors worldwide are bracing for potential market shakeups. With economic policies, geopolitical stances, and regulatory frameworks at stake, understanding the election’s impact on global markets is crucial. To unpack the impact of the upcoming election, we asked the CMC team how they’re viewing this pivotal event and its implications for both the short and long term.

Historical view

In previous election cycles, what sectors or asset classes have shown the strongest correlation with political outcomes?

Matthew England: Historically speaking, the healthcare sector sees volatility depending on changes in policy brought in by the winning candidate. When Trump was last elected, Pfizer (PFE:US) jumped 7.7% on the first trading day post-election, and multiple healthcare ETFs also rose sharply. The defence sector is expected to see sharp gains if Trump is elected, due to the promised increase in defence spending from his administration. Commodities also performed well in Trump’s last election, whether the exposure came from trading oil and gas futures or single stocks like Chevron (CVX:US).

Fraser Allan: Despite the media hysteria surrounding the importance of the election winner on stock markets, historical research tends to show that the result has very little impact on medium to long-term returns. Policy, and whether one party controls both the White House and Congress, can be of more importance. However, investors should not lose focus on inflation and other major economic data. For this election, the key sector I’ll be monitoring is energy and whether the transition stalls or accelerates.

Henry Fisher: Defence and healthcare have long been tied to government spending and are sensitive to political shifts. Leadership changes can alter sector priorities, as seen with Reagan’s military buildup or Obamacare. This time, individual policy stances, like Trump’s tariffs or Harris’s taxation changes, could also have wide implications. That said, market forces often outweigh policy influence. In Biden’s last term, oil and gas thrived, while under Trump, renewables performed very well, a contrast to their policy and ideological positions. Investors shouldn’t assume political outcomes will always align with sector or asset class performance.

Carlo Pruscino: The USD tends to react quickly to election outcomes. Trump’s unexpected victory in the 2016 US election saw the USD move in line with market odds, which were shifting minute by minute. When it became clear that Trump would win, the USD surged as Trump was viewed as pro-business. EUR/USD fell from close to 1.1300 down to 1.0350 over the following months. US equity markets also reacted quickly; for example, in 2016, the Dow jumped from 17,500 to 21,000 in the following months as Trump was seen as pro-business.

Trading behaviour

What behavioural biases do you think traders should be most aware of when navigating election-driven market swings, and how can they avoid common traps?

Carlo Pruscino: If the election outcome is close, be nimble with your trades. Try not to get attached to your trades, as information on who might win could change quickly if it’s a close result. Check websites such as Oddschecker to see where the ‘flow of money’ is going. These odds sites might be able to pick up a change in trend and trading behaviour. Plan your trade, then implement it, rather than getting overwhelmed by all the information and the circus around the election. Have pre-set stop loss and take profit levels because currencies and equity indices can move rapidly.

Jimmy Pan: I remember back during the 2016 elections, when Trump was elected unexpectedly, the stock market sold off sharply due to the uncertainty this created. Traders who had a bias against him, thinking he lacked political experience and could create instability, stayed short for months until they eventually had to close their positions. In hindsight, we saw the markets hit new all-time highs as his pro-business policies spurred economic growth, low unemployment, and rising corporate earnings. To sum up: beware of the initial move, let the dust settle, reassess, then make your move.

Fraser Allan: Elections can create short-term volatility, especially in a tight race like this year. Traders will often take a position going into the election and close out soon after the result, which can induce sharp swings. This is known as ‘buy the rumour, sell the fact.’ Understanding your own risk appetite and managing risk accordingly is important when navigating the election.

^{Vice President Kamala Harris, addresses a rally at the Dort Financial Center on October 4, 2024, in Flint, Michigan.}

Sector focus

Which industry is most likely to experience regulatory changes based on election outcomes?

Henry Fisher: The cryptocurrency industry could face regulatory changes in the US post-election. Trump has vowed to make America the 'crypto capital,' while Harris has expressed support for digital asset innovation. With existing regulatory gaps, clearer guidelines may emerge, fostering greater confidence and growth. Public statements indicate Trump is more pro-crypto, which could lead to stronger rallies in Bitcoin and altcoins if he wins.

Carlo Pruscino: Not sure, but if Harris wins, I can't see any material changes. If Trump wins, mega-tech companies or large caps with strong trade relations with China would be under the microscope.

Fraser Allan: Major climate policy will be in focus. If Trump wins, it’s highly likely he will once again scrap emission-related policies. This will impact the energy sector, particularly clean energy stocks. Companies with high exposure to fossil fuels may be able to eke out gains for longer than they would under a Harris government.

Risk management

How should traders think about risk management and portfolio hedging in the weeks leading up to, during, and following the election?

Jimmy Pan: Historically, election nights are volatile, and traders who are heavily leveraged should think about how they will manage their exposures. Some considerations are:

• Do I have a sufficient buffer in my account to withstand the volatility? Do I need to reduce some of my exposure?

• Am I highly concentrated in a particular sector that could be more sensitive during an election?

• Am I comfortable with my gearing level going into the election?

• Have I put in stops or GSLOs to ensure I don’t get margin called?

• Have I considered putting hedges in on my share portfolio?

Matthew England: The use of either options on our Invest platform or CFDs can be an effective way to hedge during and post-election. In terms of risk management, ensure you have sufficient liquidity on hand to meet any margin requirements that can result from increased volatility.

Fraser Allan: Diversification is crucial in managing portfolio risk, and this is amplified going into a major event like the US election. Investors could spread exposure across different sectors or use ETFs to gain broader exposure, especially for more modest portfolios. Another approach would be to keep cash on hand to snap up positions once the result is known.

Carlo Pruscino: Keep an eye on the polls, but remember they can be wrong, as they were in 2016. It’s prudent to have pre-set exit levels when managing positions. Plan your trade with a reward/risk ratio in mind and set stop losses and take profits. In terms of hedging, if you’re concerned about your long holdings and expect a sell-off, consider selling CFDs on equity indices where you have exposure or shorting individual stocks via CFDs.

Geopolitics

Do you anticipate any geopolitical surprises from global markets in response to the US election?

Carlo Pruscino: A Harris victory is unlikely to bring any surprises. A Trump win would put the US-China trade relationship under scrutiny. It could lead to increased costs if global tariffs rise.

Henry Fisher: If Trump or Harris were to bring about a peaceful resolution to conflicts in the Middle East or Eastern Europe, it would be a major geopolitical surprise. Such a resolution could significantly impact commodities markets. Trump's approach to China remains uncertain and may bring surprises, particularly regarding Taiwan, with major implications for global geopolitical relations and markets.

^{Donald Trump addresses supporters at a campaign event at Saginaw Valley State University on October 3, 2024, in Saginaw, Michigan.}

Watchlist

What instrument/s will be on your watchlist during the election period?

Carlo Pruscino: USD/JPY – one of the most volatile USD currency pairs, so there are likely to be plenty of trading opportunities. Additionally, the Fed and the BoJ have divergent monetary policies – the Fed is easing aggressively, while the BoJ is looking to tighten if data permits.

Jimmy Pan: I would be watching the VIX, Magnificent 7, US indices, US dollar crosses, and healthcare and defence stocks.

Fraser Allan: Sunrun (RUN:US), the popular solar panel company. Analyst consensus 12-month price targets show an approximate 25% upside, and the company will benefit from a Democrat win given their pledge to drive support for clean energy. However, if Trump follows through on his anti-renewables rhetoric, including his promise to repeal energy tax credits under the Inflation Reduction Act (IRA), Sunrun’s growth could be stunted, and the stock price may suffer. Trump has frequently referred to the green agenda and the Green New Deal as a 'scam.'

Platforms

Which feature on our platforms (Invest, Next Gen, or MT4) can clients use to support their strategy during the US election period?

Carlo Pruscino: Next Generation – set alerts to your phone. Use the alerts function for the products you’re trading if you aren’t watching the markets closely during the debates. That way, you won’t miss any opportunities.

Henry Fisher: Our CMC Invest clients can monitor thematic watchlists, featuring curated lists of shares across 22+ themes. For the election, clean energy, oil and gas, and China tech will be key themes to watch before and after the event. Building your own watchlist of shares to track during the election is also crucial.

Election night

What real-time data should traders have alerts set up for during election night, and how should they be prepared to react instantly?

Jimmy Pan: Election night will be chaotic, so being prepared beforehand is super important if you want to trade the volatility. Within the CMC platform, you’ll have access to Reuters news, client sentiment, the VIX, and US indices. Other popular news sources include CNBC, Yahoo Finance, Google election results, and the Associated Press (AP) for fast and accurate election results. Lastly, consider social media platforms, but be cautious of the noise – my choice would be X (formerly Twitter), where you can follow prominent political figures, trending hashtags, and live coverage in bite-sized updates.

Carlo Pruscino: Definitely scour a selection of US news sources, choosing both left-leaning and right-leaning outlets for a balanced view. It’s crucial to check a site like Oddschecker, especially if the election is close.

Henry Fisher: Polymarket is a blockchain-based decentralised prediction market that reacts in real time. During the presidential debates, you could observe market spikes as it responded to key moments. I’ll be keeping a close watch on election night to see how predictions shift as results come in.

Election outcome

Which election outcome do you think has the greatest potential to significantly move the markets, and why?

Carlo Pruscino: Given that Trump and the Republican Party have traditionally been pro-business and less regulatory, a USD rally of some degree could be expected from a Trump win. A Harris win would be more of the status quo and unlikely to move markets.

Henry Fisher: A Trump win could trigger a stronger market reaction, as his policies seem more disruptive. In contrast, a Harris-led administration may signal more continuity. With the race so close, volatility seems possible either way.

Fraser Allan: Historical evidence shows that markets tend to react more to a change in government, meaning a Trump win should create higher volatility. Coupled with his strong views on China tariffs, climate change, and deregulation, we could see fireworks if the Republicans return to office.

Long-term outlook

Should long-term investors adjust their strategy for the election?

Fraser Allan: This depends on the investor’s current portfolio allocation. If the portfolio is positioned towards the energy transition, then hedging against a Trump victory would provide downside cover. They might have to wait longer, as incentives for firms to invest in climate change projects would be diminished.

Carlo Pruscino: Federal Reserve policy and economic growth are likely to be the key influences for long-term investors, rather than a new government or the incumbent being re-elected. Trump’s tax policies would be seen as pro-business, leading to a more sustained equity market rally in the long term.

Jimmy Pan: Long-term traders should look at market fluctuations as an opportunity to top up any underweight exposures in sensitive sectors such as energy, healthcare, defence, and technology. Volatility is normal leading up to and immediately following an election, so avoid making drastic moves. A disciplined, diversified long-term approach will yield better results than reacting to short-term election-driven volatility.