The 2024 Presidential election season is here. Traders and investors are wondering one thing. How will the outcome affect market volatility?
Historically, election years bring heightened uncertainty, and this year is no exception. The outcome of the election could significantly influence fiscal, monetary, and regulatory policies.
Which all, in turn, affect futures markets.
How Does the President Influence the Stock Market?
Presidential Policies and Economic Impact
Presidential policies have a significant role in shaping economic conditions. Which, in turn, can affect stock market performance.
This is mostly tied to a president’s new fiscal policies. Like tax reforms or government spending programs. Both of which can either boost or dampen investor confidence.
Election-Induced Volatility
Election years are often marked by increased volatility in the stock market. This is primarily due to uncertainty about future policies.
According to historical data:
- The S&P 500 has shown increased volatility during election years as investors weigh potential outcomes.
- Markets tend to perform better when there is a clear winner early on in the election process.
Why Futures Markets Can Be Especially Volatile
Futures markets are particularly sensitive to political events.
Since futures markets are forward-looking, they tend to react strongly to any uncertainty about future economic conditions. Which is exactly what elections bring.
Traders often adjust their positions based on potential shifts in policy that could affect the broader economy or specific sectors.
Historical Trends of Futures Market Performance During Election Years
Historically, futures markets have shown heightened volatility during election years.
Let’s look at some key trends:
- 2008 Election (Obama vs. McCain): The financial crisis was already causing significant market stress. Futures markets saw even more volatility as investors speculated on how each candidate would handle the economic downturn. Obama’s victory led to a rally in renewable energy futures, given his focus on green energy policies.
- 2016 Election (Trump vs. Clinton): Leading up to the election, futures markets were highly volatile due to uncertainty about Trump’s trade policies and Clinton’s regulatory plans. After Trump’s victory, stock index futures surged as investors anticipated tax cuts and deregulation.
- 2020 Election (Biden vs. Trump): The COVID-19 pandemic added another layer of complexity to this election year. Futures markets reacted sharply to both candidates’ economic recovery plans. Healthcare and technology futures saw significant movement based on each candidate’s approach to handling the pandemic.
While each election year is unique, there is one common theme. Futures markets tend to experience more volatility than usual due to the uncertainty surrounding potential policy changes.
Key Factors to Watch
Economic Policies
One of the most important factors to watch is each candidate’s stance on economic policies. Here are some key areas to monitor:
- Taxation: If a candidate proposes tax cuts for businesses, this could boost corporate profitability. Leading to higher stock prices and increased demand for stock index futures. Yet, if a candidate proposes higher taxes on corporations or capital gains, it could lead to reduced investor confidence. And, as a result, lower futures prices.
- Government Spending: Large-scale government spending programs, such as infrastructure projects or defense spending, can benefit specific sectors. For example, an increase in infrastructure spending could boost futures tied to construction materials or industrial companies.
- Regulation: Regulatory changes can have a significant impact on industries like energy, healthcare, and technology. A candidate who favors deregulation might boost futures in sectors like oil and gas, while increased regulation could weigh on those same markets.
Geopolitical Concerns and Global Trade Relations
Beyond domestic policies, geopolitical issues will also play a major role in shaping market sentiment during the 2024 election. Futures markets are particularly sensitive to global trade flows and international relations. Here are some key geopolitical factors to watch:
- Trade Relations with China: The U.S.-China trade relationship has been a major driver of market volatility in recent years. A candidate who supports tougher trade policies with China could lead to increased uncertainty in futures markets tied to commodities like soybeans or oil.
- Ukraine Conflict: The ongoing situation in Ukraine has already had a significant impact on global energy prices. A candidate’s stance on foreign policy in Eastern Europe could influence futures contracts tied to oil and natural gas.
- Middle East Tensions: Geopolitical instability in the Middle East often affects oil prices. Futures traders should closely monitor how each candidate plans to address tensions in this region, as it could lead to swings in energy futures.
Federal Reserve Policies Post-Election
The Federal Reserve plays a crucial role in shaping U.S. monetary policy, which directly affects interest rates and inflation. Both of these are two key drivers of market performance.
While the Fed operates independently of the president, its actions are often influenced by broader economic conditions that may be shaped by presidential policies.
- Interest Rates: If a new president enacts policies that lead to faster economic growth (e.g., tax cuts or increased government spending), the Fed may respond by raising interest rates to control inflation. This would have a direct impact on bond futures and other interest rate-sensitive assets.
- Monetary Policy Signals: Traders should also watch for any signals from the Fed regarding its post-election plans. If the Fed hints at tightening monetary policy (e.g., reducing its balance sheet or raising rates), this could lead to increased volatility in futures markets.
Short-Term vs. Long-Term Effects of Presidential Elections on Markets
In the short term, markets tend to react to the uncertainty surrounding an election. Investors may become cautious as they try to predict how policies under a new administration could affect corporate profits, interest rates, and overall economic growth. This uncertainty often leads to increased volatility in both the stock market and futures markets.
- Short-Term Volatility: Historically, markets have experienced short-term volatility around election day and in the weeks leading up to it. For example, in 2016, the stock market saw significant swings as polls fluctuated between Donald Trump and Hillary Clinton. After Trump’s victory, futures markets initially plunged but quickly rebounded as investors digested his pro-business policies.
- Long-Term Stability: Over the long term, however, the stock market tends to stabilize once investors have a clearer understanding of the new president’s policies. For instance, after initial uncertainty following Barack Obama’s election in 2008, the stock market entered a long bull run as his administration’s policies became clearer and economic recovery took hold.
In many cases, long-term market performance is driven more by broader economic trends—such as corporate earnings growth, global trade dynamics, and Federal Reserve policy—than by who occupies the Oval Office.
Can Midterm Elections Also Impact Futures Markets?
Yes, midterm elections can also impact futures markets, though typically to a lesser extent than presidential elections. Midterms determine control of Congress, which will influence key legislation towards economic sectors.
- Legislative Gridlock: If midterm elections result in a divided Congress (where one party controls the House and another controls the Senate), it could lead to legislative gridlock. This can create uncertainty for businesses and investors, as it becomes harder to predict whether new economic policies will be passed.
- Sector-Specific Effects: Certain sectors may react more strongly to midterm election results. For example, healthcare futures might fluctuate based on whether Congress is likely to pass or block healthcare reform legislation.
While midterms generally don’t cause as much market volatility as presidential elections, they can still have a noticeable impact on futures markets—especially if control of Congress shifts significantly.
How Can ETF Help?
How can ETF help you in this scenario? EVALS and Addons!
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For traders looking to navigate this volatile period, our trading firm offers several add-ons that can help manage implied volatility and enhance profitability
Educational Resources:
We provide a range of educational resources, including our Youtube channel.
As always our community on Discord is the best place to learn not only from us, but from fellow future traders. Join our Discord here.
Conclusion
The presidential election will be a pivotal event for futures markets. By staying informed about the potential impacts and utilizing the right tools, traders can navigate this period of uncertainty and position themselves for success.
Our firm is committed to supporting traders through these times with comprehensive evaluations and valuable add-ons to enhance their trading strategies.
