FILE – President Jose Biden appears on a screen as trader Mark Putzer works on the floor of the New York Stock Exchange, Nov. 29, 2021. Investors from Mexico to France to India have been keenly aware of the impact elections can have on financial markets in recent days. With elections scheduled in major countries including Britain in July and the United States in November, there will likely be more opportunities for such volatility in the future. (AP Photo/Richard Drew, File)
NEW YORK (AP) — Elections affect financial markets, but what that means for investors can be hard to predict.
Look at France, where the French stock market recently had its worst week in more than two years on fears that the president’s centrist party could lose the election, while in India, doubts about the margin of victory for Prime Minister Narendra Modi’s party caused Indian shares to plummet from a 3.4% gain to a 5.7% drop over three days this month before reversing to a 3.2% gain.
“Elections have consequences,” Morgan Stanley strategists wrote in a recent note, “but when it comes to discerning their impact on financial markets, it’s easy to mistake noise for signal.”
Surprising election results have shaken markets recently around the world, from Mexico to South Africa, and more change is likely with more than half of the world’s population set to go to the polls in 2024, according to BlackRock Investment Institute.
The UK elections in July are looming, and later this year the US presidential elections in November will bring their own volatility to markets. All of this will create a lot of uncertainty for financial markets, which are notoriously averse to it.
The biggest aftershocks have rattled stock markets around the world, but the bigger threat may be in the traditionally quiet bond market, where many of this year’s surprise victories have raised speculation that winning countries will ask their governments to boost spending without raising revenues.
Easing fiscal policy could make it harder for governments to repay their debts, and nervous investors are already punishing governments by demanding higher interest rates before lending.
“The bond market has very low tolerance for fiscal overspending these days,” said Niladri “Neil” Mukherjee, chief investment officer at TIAA Wealth Management.
Mukherjee said the bond market could remain calm in the upcoming US elections if no party wins the White House and both houses of Congress. But if one party takes power and fiscal policy decisions become easier, the bond market could see a spike in US Treasury yields. That would raise mortgage costs, increase the chances of a recession and drive down stock prices.
“That’s exactly what I’m thinking,” Mukherjee said. “Not many people are talking about the bond market and its reaction.”
Take France, for example. Earlier this week, bond investors were demanding an extra 0.75 percentage points for a 10-year loan to the French government, while a similar loan to the German government was seen as a safer bet. A week ago, before the far-right party’s surprise victory in the European elections, investors were demanding just 0.48 percentage points.
That may not sound like much, but it counts in a bond market where investors can earn just a 2.36% return on a 10-year loan to the German government.
One of the challenges for investors is the difficulty of profiting from or protecting against election results, as financial markets constantly fluctuate based on who is leading the polls. To get ahead of the curve, investors need to be forward-thinking enough to know what the unexpected surprises will be that the market does not expect.
For example, a Republican victory in November could increase the likelihood of higher tariffs and expanded trade restrictions, which could boost U.S. manufacturing profits. But if traders see Republicans gaining ground in the polls ahead of November, manufacturing stocks should already be rising. And even if an investor correctly predicts a Republican victory, if the overall market isn’t leaning Republican, that investor also needs to know when those trade policies will take effect to maximize profits. There’s a lot to get right.
Many professional investors don’t plan on predicting what their investments will do immediately after an election, but rather on what they expect their investments to do in the next few years.
In India, for example, Prime Minister Modi’s failure to win a parliamentary majority could delay some of his economic reforms, but the world’s largest country still benefits from a young population and from companies’ long-term efforts to restructure global supply chains after the pandemic revealed the risks of over-reliance on China, according to strategists at BlackRock Investment Institute.
Moreover, the U.S. stock market has historically tended to rise regardless of which party controls the White House, and U.S. government debt has also ballooned under both Presidents Donald Trump and Joe Biden.
