Trading the US election: CMC on maximising market opportunities during the presidential race

As polls and punters weigh-up a possible Trump victory in the upcoming US Presidential election, we talked to CMC Markets’ Michael Bogoevski about the consequences for investors of a Trump 2.0 Presidency.  

Donald Trump has been found guilty of 34 criminal charges in New York State. He has threatened China with tariffs, warned NATO he’ll cut funding, and is seen to be notoriously unpredictable. Yet, Trump is currently the candidate to beat in the upcoming US presidential election. 

How are markets reacting? They’re fine with it. 

“Markets don’t trade the personality; they trade the policy,” says Michael Bogoevski, Head of Institutional at global online trading platform CMC Markets, which specialises in contracts for difference (CFDs) and foreign exchange across world markets. 

“Yes, there are geopolitical questions for sectors within the markets that will be heavily affected. However, the reality is that both Trump and the Democrats have been generally pro-business. To date, there is no indication that will change, even with Kamala Harris now stepping into the running after Joe Biden’s withdrawal. I don’t expect a Vice President to have contrasting economic or foreign policy platforms this late in the campaign. It’s the party apparatus that forms the platform of targeted issues not just the individual.” 

While markets have been relatively unperturbed by news from the US election campaign to date, with even an assassination attempt on Trump being met with a muted initial reaction in opening trade on the Monday following the event, Bogoevski says investors should be ready to take advantage of opportunities. 

“Investors should have some dry powder ready to deploy during the Australian session post-polling. While betting agencies currently favour Trump [at time of publication], a Democratic win could cause market turbulence. Be prepared for both scenarios,” says Bogoevski. 

“The swing voter may be the only factor left in causing a Trump loss, for which markets are not priced, with everyone cornered to one side of the boat. Furthermore, it’s these constituencies  
that are often very difficult to poll. 

“For anything that is a macro event like this with the viewpoint so one-sided and well-priced in, you should have your watch list and risk capital ready for action, should things evolve on the contrary.” 

The US election as a macroeconomic event in three acts

Bogoevski views the US Presidential election in three parts: the pre-election period, election night, and post-election. 

During the pre-election period, investors are war-gaming thought experiments to potentially de-risk.  

That means thinking about how markets might move in certain scenarios and deciding on strategies and actions to reduce the exposure to risk in an investment portfolio. 

“The people who move markets are the CIOs with hundreds of billions of dollars  in funds under management. It’s probably too early for them to start de-risking their portfolios. 

“But if anything, they’re probably de-risking towards a Trump win, focusing on sectors that will be affected by any policy he brings in. For example, anti-China tariffs on cars.” 

On election night in November, Bogoevski says investors should be ready with a watch list of potential stocks to buy if the market starts selling. 

“When the polls turned towards Trump in 2016, we saw a huge sell-off in the market. Then, there was a huge V-shape recovery. If you did nothing, you ended up higher on the night. But if you panicked, you sold at the low and saw the market rip your face off.” 

Key markets to watch include US Index futures, Gold and the US Dollar Index which will be highly sensitive during polling results day, during Australian and Asian market hours. 

“I think the markets learned their lesson. I don’t think they’ll be as sensitive this time as they were in the past.” 

The post-election period, however, is the main “destabilising factor”. 

“The known unknown is how a new US Government would react regarding its foreign policy stance. We’re not seeing that being priced in anyway. We don’t know how to risk-assess a situation like that,” Bogoevski says. 

He says US foreign policy is likely to be contained in the event of a Trump election, rather than the current Democratic Party policy, which has been very expansionary and aggressive. 

“One thing Trump did well was starting to mend the ties between Israel and Arab nations with the Abraham Accords and re-engaging the Emirates. If he returns to office, his administration will likely look to pick up where it left off. Concerning Ukraine, surely, there’s no way Trump will support further financing for NATO. That means the Ukrainians may navigate towards some kind of peace accord that involves partitioning part of Ukraine. 

“All this would de-escalate the wars. We would still be left with questions around Taiwan, which would likely be a factor in the post-presidential period when we’re able to have a clearer view of the foreign policy stance of the winning government. The policies of the rival parties in Taiwan  
are likely to be polar opposites, similar to Ukraine.” 

Follow the liquidity

While the election headlines grab attention, investors need to look beneath the surface and focus on the main drivers of markets. Bogoevski says there’s one thing investors should watch closely: liquidity. 

“As traders and investors, we care about whether there’s liquidity being pumped in the system,” says Bogoevski. 

The US government is likely to provide ample liquidity in the lead-up to the election and in the post-election period, which should be good for markets, Bogoevski says. 

“If you track liquidity within the business cycle, you’ll have a better chance of tracking markets and forecasting than if you were looking at stock valuations or pure data-based headlines alone. 

“Do you want to be long on European stocks when Trump wins? Probably not. You want to go where the money’s going, which is liquidity in the US with either candidate.” 

The paradox is that despite two major wars, volatility has been structurally contained, and markets remain largely undisturbed. 

“That’s because social volatility does not necessarily lead to market volatility,” says Bogoevski.  

“There’s a dichotomy between what the markets are doing and how people feel. There’s a dichotomy in the volatility of how we see geopolitical issues on the streets versus how the markets are pricing risk.” 

“The truth is, we’re in a golden period, with lagging global GDP and inflation on a downward trend, which gives central banks the conviction to prop economies up via a plethora of liquidity mechanisms, some very obvious like interest rates, others less so like differing types of bond issuance.” 

Assuming we’re in the mid-cycle of the current market rally, “the worst thing to do is overthink it”, he says. 

Sometimes, the trick to being right is to do nothing. 

“If you have a system where liquidity is good, which then contains volatility, then the markets are doing everything you need them to do right now. 

“Could that change? Yes. No one sends you a memo and tells you when the market has changed its mind. But this is the beauty of the system. It’s a game where the rules change. You’ve got to work out how the market is voting in a financial world that is six to twelve months in the future.” 

The election is a part of this puzzle, of course, but it’s only a single square on the Rubik’s cube.  

While the election could throw up challenges and opportunities for investors over the coming weeks and months, traders need to remember to look at the whole picture and what truly moves markets nowadays when developing strategies. 

_{The article is intended to provide general information only and does not take into account your individual objectives, financial situation or needs. Seek independent advice and consider the relevant Terms and Conditions at cmcmarkets.com.au when deciding whether to invest in CMC Markets products.}