Business and politics don’t always mix together. However, there are political risks that can expose you and your investments in a bad position.
Political risks involve an increase in taxation, tariffs on a business’s profit margins, nationalization of businesses, etc. Any of these can undermine share prices in online CFD trading market. With the elections just around the corner, traders have become wary again. Only one will emerge from the Republican and Democratic nominees and the result may have major effects on the market.
How does Election Affect the Online CFD Trading Market?
We have witnessed a lot of surprises in the 2016 presidential race and until now, there is no clear frontrunner. This is bad news for traders who depend on calculated predictions and detest uncertainties. However, based on the previous years, you can easily map out what’s going to happen during and after the elections.
The Election Cycle and Market Returns
The US has a 4-year electoral cycle. What happens during these four years is usually the same—volatility develops in the first year of election, then peaks on the second year, which implies that global equity markets generate lower returns. As the new election is nearing, volatility decreases and returns move sideways because the market is back to being uncertain. In the final year of the cycle and the end of a president’s term, the average market returns fall to about 6.1% in the negative territory.
In the election year itself, online CFD trading market has the tendency to fall, especially is it’s the final year of a president’s second term. This is exactly what’s happening now in the US.
While there are no strict rules as to how you can predict future returns in relation to Presidential Elections, there have been theories developed about it. One of these theories is by Yale Hirsch, founder of the Financial Services Hirsch Organization. According to his Presidential Election Cycle theory, markets are the strongest during the 3rd year of presidency. On average, there are about 11.5% gains in the 2nd year of every president’s term and this rises to 17.5% in the 3rd year. Still, this is not always true (as proven by the financial crisis experience in 2008).
Presidential Election Results and Online CFD trading Market
Based on the previous 100 years of documented elections and economic changes, experts have discovered that the stock market performs better under a Democratic president. For example, the Dow Jones Industrial Average shows an average return of 82.7% under a Democratic leader, compared to the 44.8% return under a Republican one. Therefore, election results can greatly affect movements in the online CFD trading market. However, this is also true the other way around.
The market can affect election results. How? It has been found that when there is a significant gain in the market, the incumbent can usually win the re-election in a landslide. Why? Because a booming economy is a good indicator that the government has issued sound policies.
The relationship between the elections and the market is clear. However, it’s not reasonable that you solely base your trading decisions based on who wins and gets re-elected. You should focus on your personal goals and keep an eye on broader economic trends.
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