Preparing for the stock market's surge

 

Written: 20/11/02 07:30 GMT FXTM Senior Market Strategist Hussein Sayed

Last week was a week when risky assets plunged, with global and U.S. stock markets reporting their biggest drop since the March plunge. Investment sentiment has been shaken by a number of factors, including the resumption of lockdowns in some European countries, rising fears of a double-dip recession, and rising chances of a U.S. presidential election.

On Tuesday night and Wednesday morning, when the next U.S. president is to be decided, the whole world will be up all night. However, due to the increased number of postal votes and the time required for counting, the announcement may be delayed by days or weeks (if the initial count is close). So investors need to be prepared for increased market volatility.

With Democratic candidate Joe Biden leading 8-10 percent across the country and a fine lead in key races, Biden appears to have gained an upper hand in tomorrow's election. However, investors still vividly remember the 2016 presidential election, when Trump, who was lagging behind in public opinion polls, overturned and won the presidential election.

While Biden's victory, which is expected to see massive fiscal stimulus and improved trade relations during his presidency, is now seen as a more favorable scenario for the U.S. and global stock markets, his policies could face hurdles if Democrats lose control of the Senate and the House of Representatives.

However, if the blue wave (Democratic Party's control of the Senate and House of Representatives) is realized, the stock market can now record a reporting point. The basic scenarios expected if blue waves are realized are value stocks ahead of growth stocks, emerging markets ahead of developed economies, and dollar weakness due to fiscal deficits and bond issues. Under this scenario, we're curious about how large tech stocks will move, but in other respects, the corona proliferation has not yet subsided, and technology stocks will continue to benefit.

Biden's victory and Republican control of the Senate would be the worst-case scenario for investors, at least in the short term. In this case, additional adjustments are expected, with the non-market falling 10-15%. The reason is that the passage of the new stimulus could be delayed further. But it also depends heavily on the Corona situation. If the vaccine is available by the end of the year or early 2021, the U.S. economic recovery will continue, but it will be slower than if there are financial stimulus support.

The least likely scenario is President Trump's victory and Republican control of the Senate. This is the second best scenario, where the non-market will continue to rise, but growth will continue to outperform value stocks, and the energy sector, which has fallen heavily during the break of alternative energy stocks, will rebound. Oil prices will fluctuate for weeks.

Whatever the outcome of the election, let's hope to see the outcome within Wednesday night, the election day. Otherwise, uncertainty can increase volatility for weeks or months if the results of the poll are close to each other and there is a higher chance of dissenting the poll results.