The October Surprise for Traders – What to Expect Around Election Time?

Every four years eligible US voters elect a new president. The incumbent, Donald J. Trump is facing the toughest test of his political life. The polls indicate that Trump is trailing Biden by a huge margin, well outside the MOE (Margin of Error). This does not bode well for the GOP, as it threatens a blue wave across the country. For the most part, former VP Joe Biden has been coasting along, allowing his opponent to derail his own campaign.

From the public’s perspective, the most important issues include dealing with the coronavirus, with therapeutics, contact tracing, vaccine development, and regulatory measures to stop the spread, as well as the economic impact of monetary and fiscal policy under the next administration. Both of these issues are inextricably intertwined as far as traders and investors go. There are plenty of opportunities to short sell stocks, or go long on them, depending on the specific industry and the policies of the next administration.

Now that we are in the midst of October, leading investors have lined up a selection of what they believe to be top stocks for the month. Several ranking stocks have performed well heading into the November elections, including the following:

Image: Depositphotos

Investors are also pushing the prices of renewable energy stocks higher in anticipation of a Biden victory (Ahead of the elections we are also working on compiling a list of penny stocks to watch using hedge fund holdings and various other data sources).

Trading Strategies Based on Political Affiliation

For GOP supporters, the following thought processes determine trading activity:

– President Donald Trump is known in corporate circles to be in favor of low corporate taxes, middle class tax cuts, deregulation, and buy and build American. He is also in favor of fracking, US oil, US natural gas, US coal, and zero-reliance on Middle East oil and energy. His pro-America policies favor local enterprises over foreign enterprises.

Coupled with a pro-Second Amendment stance, many industries such as arms manufacturers, military equipment companies, and the like will benefit from a Trump reelection. Trump is largely seen as a positive force for economic growth and development, although Democrats would argue that his trade policies severely affect American enterprise by way of higher prices (tariffs and taxes) imposed upon them. Regardless, the general consensus among voters is that Trump is good for the economy

For DEM supporters, the following thought processes determine trading activity:

– President Joe Biden is perceived as a moderate who is able to work across the aisle, inviting Democrats and Republicans to reach consensus on major policy decisions. Indeed, Biden has been around for 47 years +, and is part of the proverbial furniture in Washington DC. His policies are vastly different to those of Trump. He believes in a tax and spend approach to the economy. This entails repealing the Trump-era tax cuts, and raising corporate taxes. It would also mean that middle-class families would have many of their tax benefits removed, as the Biden presidency attempts to raise revenue for economic development, via infrastructure spending to the tune of trillions of dollars.

Corporations will have to pay higher tax rates, invariably leading to lower profits and slower growth. As far as economics go, higher corporate taxes will likely result in layoffs, anemic 401(k) growth, and lower aggregate demand. Democrats argue that the tax hike will not affect families earning under $400,000 per year, but any repeal of Trump tax cuts would do precisely that. As proponents of the Green New Deal, Biden’s party wants to reduce/curtail American use of coal, oil and natural gas. Alternative energy sources will become the focus of government, with rising fuel costs expected across the nation.

As an investor, October is particularly worrisome in terms of 401(k) portfolios. Certain industries are likely to boom such as pharmaceutical companies producing therapeutics, treatments, PPE, and vaccines. In the event of a nationwide shutdown, certain industries such as the travel and tourism industry, cruise ship industry, airline industry, food service industry, et al will suffer immeasurably and possibly declare bankruptcy or insolvency in the absence of a government bailout.

401(k)s will react in a big way to the election results, as they become apparent. Therein lies another conundrum for traders and investors; what if the mail-in ballots are disputed? It could take days, weeks, or possibly even months for all the outstanding ballots to be tallied across the nation. This delay could have an effect on the markets – the longer it goes on, the more volatility and uncertainty there will be. This means lots of whipsaw pricing, with short sellers cashing in on fear and uncertainty, and investors staying the course hoping to buy in on the dip.

Disclosure: None