Politics is a major factor impacting economics all over. The entire world is curiously following the Trump-Biden drama ahead of the upcoming presidential elections of the super power United States of America.
Historically, it has been proven that the swings in the stock markets from New York to Singapore, Tokyo to Mumbai are enormous during the times of huge political events. The past shows that out of the only time the equity markets had fallen 3 months and 6 months after the election was in 2008 due to the subprime crises. And in 2001, which is exactly after 1 year of the US election, markets had fallen due to the US terrorist attacks on WTC. The rest of the time, markets have cheered the outcome and the one-year gains have been at an average gain of more than 15 percent. So as the trend suggests, the likelihood of equity markets to fly is higher irrespective of Trump or Biden be in power.
More so, whether Trump or Biden wins, the pandemic impacted macro-economic strategies may not digress much. The Federal Reserve’s low-interest policy is expected to continue, especially in the near-term. This will boost the capital flight to emerging markets specially India, China, Indonesia etc. in search for higher returns. This is a big plus for Indian markets as it would result in the continued inflow of cheap capital into Indian stock as well as debt markets.
As seen in the above chart of US Dow Jones and Sensex, the historical pattern suggests that both share a high degree of positive co-relation. Both Trump and Biden have promised bigger stimulus, irrespective of who wins, the announcement of it will lead to a boost in the US stock markets. Since both the indices are positively correlated, Indian markets too shall remain on an upward trend supported by global sentiments. Hence, in the medium to long run, there are prospects of money flowing into the Indian Capital markets post-election.
Further, the election cacophony closer to home is equally music to the ears (pun intended!). Closer to home, we have the Bihar state elections coming up shortly. Who-so-ever be the next Chief Minister, the sharp swings in the stock markets are likely to be the trend in the coming weeks.
It is proven by past data analysis and research that high volatility is associated with the markets during elections. However, the volatility is more of a short term phenomenon and gradually the election-driven volatility (and returns) die down over the medium to long term. The table below depicts the returns on BSE Sensex values, 6 months before the Lok Sabha elections and 18 months post the Lok Sabha elections. The returns have been happily positive in almost all cases. Markets cheer up from the short term volatility gradually.
Therefore my dear investors, let us not get distracted by the election cacophony around us. Stick to the fundamentals, stay away from the noise. It’s time to be an intelligent investor and not a prudent punter! The markets would be volatile in the next few weeks. Identify your picks. Let’s bite in to grab your pie of the cake at low levels. And book profit if markets touches new high in short term.
And what about the elections in all this cherry picking? – May the best man win!