Clarity over US vote outcome key to risk-on trade in stocks

Clarity over US vote outcome key to risk-on trade in stocks

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NEW DELHI: From 18 level at the start of the month, volatility index India VIX has climbed to 25, as the benchmark indices seesawed ahead of the crucial US vote.
BSE Sensex has tanked 908 points in last three sessions and 2.3 per cent during the week gone by, with an average daily swing of 695 points in terms of high-low difference. US stocks, on the other hand, have fallen in seven out of last 10 sessions.

Analysts said the market is jittery that a second wave of Covid-19 cases in the US and Europe may bring back lockdowns. On the other hand, a decisive election outcome may pave the way for the much-delayed US stimulus that may support the economy and equity markets in general, they said.

Punters thus far are favouring Joe Biden over Republican President Donald Trump to win Tuesday’s vote, with the Democratic candidate leading in bets placed in a majority of the battleground states that will decide the elections, two betting market aggregators told Reuters.

“It is not only the result where either Trump or Biden wins, but it would also be a case where Biden wins, but Trump refuses to accept it. That kind of uncertainty is clearly reflecting in the market in the way the global indices are behaving. It is better to wait and watch for next three-four days,” said Abhimanyu Sofat, VP for Research of IIFL.

Such a case of disagreement was last seen in 2000 between presidential nominees George Bush and Al Gore. Later, the US Supreme Court had to intervene in the matter.

Ryan Sweet of Moody’s Analytics said the US market generally does not see a lot of big swings leading up to the presidential election, but this one is very contentious. “There is a lot of uncertainty over the outcome,” he said

Confirmed coronavirus cases in the US are hitting new record highs and there are fears that the US may go back into lockdown. “But I do not think there is political appetite to shut down state economies again,” Sweet said.

What does history say?

History suggests Dalal Street hardly followed cues from Wall Street either in the runup or a month after the elections in the world’s largest economy.

In the runup to the 2016 elections, where Republican nominee Donald Trump and Democrat Hilary Clinton came face to face, S&P500 fell 1.11 per cent in one month till November 8, only to make a 5 per cent rebound in the month that followed.

In contrast, while BSE Sensex fell 1.75 per cent in a month to the 2016 vote, it declined another 3.25 per cent in the post-election month.

In the 2012 elections, S&P500 fell 1.89 per cent in one month to the election and another 1.01 per cent in the month that followed, as Democrat nominee Barack Obama got re-elected after defeating Republican Mitt Romney.

India’s case was pole opposite that time. The Sensex gained 0.58 per cent in the runup to the US election on November 6, 2012, and another 3.56 per cent in the month that followed.

The 2008 US elections were conducted at the time of the meltdown of the US financial markets. S&P500 declined 4.84 per cent in a month to November 4 vote, and a massive 15.96 per cent in the following month. In comparison, Sensex’s plunge was steeper at 9.92 per cent before the election, but milder at 13.18 per cent in the one month after the election.

That time the fight for the world’s strongest post was between Obama and Republican John McCain, where the former prevailed.

In the 2004 elections, both the S&P500 and Sensex edged lower in the runup to the D-Day on November 2, but Sensex surged 9.97 per cent in the month that followed against S&P’s 5.29 per cent rise.

In 2000, when the Sensex fell 2.5 per cent before the vote and rose 4.3 per cent post election, S&P500 rose 2.13 per cent pre-election and fell 6.17 per cent post-election, data compiled by ETMarkets.com suggests.

This time, despite the month-end weakness, Sensex has climbed 4.4 per cent in October against a 4.6 per cent drop in Dow Jones .

“If the US election throws up a positive result, the market will bounce back if there is clarity. Also, remember that there is a significant amount of fiscal stimulus pending in the US. If we read it right, that will get cleared as soon as the elections get over and stability returns. These two events will bring the risk-on mood back,” said Sudip Bandyopadhyay of Inditrade Capital.

Credit: Stocks-Markets-Economic Times

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