How the US Presidential Election Will Affect the Stock Market

Sep 27, 2016

In this issue:
» Exports of Developing Countries Are Under Pressure
» Why Smaller Isn't Necessarily Better
» ...and more!
Rohan Pinto, Research analyst

Yesterday, when the Sensex was down more than 300 points, I saw a report claiming that 'experts' were advising against buying stocks.

I didn't get it. Why were they suddenly bearish? Weren't they bullish just the day before? Do the views of 'experts' change every day?

A little later, I understood why the markets were nervous. I hadn't realised just how close we are to perhaps the most important event of the year, the US presidential election.

It will be held on 8 November, exactly six weeks from today. The first of the three TV debates is over. Donald Trump and Hillary Clinton have finished a 90-minute verbal wrestling match.

No wonder the markets are getting jittery. But how will the election affect your stocks?

There are two answers to this question: the complicated and the simple.

Let's handle the complicated one first. The reasoning goes something like this...

The US economy is in a fragile condition. It still hasn't recovered from the last recession. It's struggling to grow despite record low interest rates. Productivity is falling. Unemployment is high. Salaries are barely rising. There's just too much debt and too little growth to pay for it.

The conclusion?

The last thing the economy needs right now is a president who will 'shake up' the system. In other words, the markets are afraid that Trump will win.

Now, before I come to the simple answer, let's understand why this line of reasoning is so common. It's because many people don't care about a basic truth about the markets.

A stock is not a just ticker symbol rolling across the bottom of a TV screen. It represents ownership of a business. If the business does well, so does the stock.

Now, the problem is not that people don't understand this. They do. But they also understand that this link between stock and businesses does not appear to hold true on a day-to-day basis.

As long as there's no important news about the fundamentals of the business, stocks usually move on the basis of sentiment alone. If Trump is 'bad for sentiment', the 'experts' start to worry.

This brings us the simple answer. It goes like this...

The US presidential election is important. The next president will play a crucial role in shaping US economic policy. This policy will affect every economy in the world. But the impact of an individual business in a given country will probably be minimal. This is especially true if the business is in good financial health and run by competent people.

The conclusion?

No matter what happens to market sentiment, fundamentally strong businesses tend to remain strong. This is especially true in bad economic conditions, when weaker firms go bust.

So, if Trump wins, and the world economy goes into a recession, should you be worried?

As long as you're holding the best of the breed businesses in your portfolio, the answer is NO. You can sleep well at night because these will be the companies that come out on top when the recession ends.

This is why we're not worried about Donald Trump. We don't concern ourselves with market sentiment too much.

What do we concern ourselves with? Ensuring that the long-term link between stocks and businesses, works in our favour.

You can do this too. Just buy the stocks of great businesses when they are available at reasonable valuations. Then hold them until the sentiment agrees with you.

How important is the result of the US presidential election for stock market sentiment? Let us know your comments or share your views in the Equitymaster Club.

--- Advertisement ---
Crisis in India Is Closer Than You Think...

Bill Bonner and Vivek Kaul, two of the world's most independent thinkers and truth seekers have come together to warn you about a financial crisis.

A crisis that could be as big as the dot-com bust...

And it is headed straight for India!

To find out more about this looming crisis and to get a free copy of Bill Bonner's latest book - Hormegeddon (pay only shipping and handling)... Just click here.

03:10 Chart of the Day

According to a report released by the United Nations Conference on Trade and Development (UNCTAD), the overall world trade in 2015 witnessed a marked slowdown. The worrying signs are that data for the year 2016 might just be even worse. The primary reason for a slowdown is a secular weakness in the demand growth of the developed economies. Merchandise exports were further impacted due to a slowdown in China and by a fall in oil and commodity prices.

Why are Developing Countries Exports Shrinking?

The south east Asian countries who are primarily export driven economies have had to bear a severe brunt due to this decline in exports. Exports in these economies was down 0.3%. China, witnessed their trade exports decline by 0.9% in 2015 while India saw its exports decline by over 2%. The UNCTAD report finds that the decline in wage growth in both developed and developing economies to be equally responsible for the trade slowdown. For developing economies, its excess reserve of labor pools and the potential of multinational enterprises to shift production to other countries further constraining wage demand contributed to the wage income decline. An increase in wage inequality has thus caused under consumption in the world, this has impacted investment growth as well as trade.

While wage incomes were on the decline during the period of 2002-07, when world trade grew, however, that period was marked by credit fueled bubble which artificially drove consumption for some time. In fact, the present helicopter money employed by the developed nations will only add to an even more inflated asset bubble and make the inequality worse. Demand growth in developed economies and wage inequality thus remain key concerns that need to be addressed for the global trade to revive.


Smaller firms are known to create wealth faster than their larger counterparts, however, that might not always be the case. The recent June quarter results have once again exposed the fragility of these small companies to their external environment. According to Livemint, on a relative basis, small companies have been laggards vis-a-vis their large and medium sized counterparts.

Excluding banks and the volatile oil and gas sectors from the universe, the results from smaller companies have been disappointing. While firms having revenues over Rs 1,000 crores reported a 2.1% growth in its net sales and a modest growth in operating profits. Firms below Rs 250 crores have struggled and posted a decline in both their net sales and operating profit over the year. The bank credit growth seems to confirm this, there has been an increase in bank credit data to large industrial units while the small and medium industrial units have witnessed a decline.

It is interesting to note that while the fundamentals for many small firms seem to be deteriorating, many of these small companies have witnessed a sharp run-up in valuations. We think some of these companies are clearly in an overheated space and there is a case for being highly selective before making investments.


After opening the day on a positive note, the Indian stock markets trimmed some of its gains but continued to trade above the dotted line. At the time of writing, the BSE-Sensex was trading up by about 72 points while the NSE Nifty was trading up by 26 points. Sectoral indices traded on a positive note where stocks from the IT and healthcare sector witnessed maximum buying interest.

04:50 Today's Investing Mantra

"In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten." - Peter Lynch

This edition of The 5 Minute WrapUp is authored by Rohan Pinto (Research Analyst).

Today's Premium Edition.

Riding on the Growing Scooter Craze...

Why scooter are outpacing motorcycles...
Read On...Get Access

Recent Articles

All Good Things Come to an End... April 8, 2020
Why your favourite e-letter won't reach you every week day.
A Safe Stock to Lockdown Now April 2, 2020
The market crashc has made strong, established brands attractive. Here's a stock to make the most of this opportunity...
One Stock that is All Charged Up for the Post Coronavirus Rebound April 1, 2020
A stock with strong moat is currently trading near 5-year lows.
Sorry Warren Buffett, I'm Following This Man Instead of You in 2020 March 30, 2020
This man warned of an impending market correction while everyone else was celebrating the renewed optimism in early 2020...

Equitymaster requests your view! Post a comment on "How the US Presidential Election Will Affect the Stock Market". Click here!

3 Responses to "How the US Presidential Election Will Affect the Stock Market"


Sep 27, 2016

please forward "How the US Presidential Election Will Affect the Stock Market".



Sep 27, 2016

indian stock markets is overheated. p e ratio unsustainably high . market is waiting for a trigger real or false. which they will seek out this month or the next. market will fall by 20% by the end of this year.



Sep 27, 2016

Excellent article. Fully aligns with my strong views as well.

Equitymaster requests your view! Post a comment on "How the US Presidential Election Will Affect the Stock Market". Click here!
Equitymaster Agora Research Private Limited (hereinafter referred to as "Equitymaster"/"Company") was incorporated on October 25, 2007. Equitymaster is a joint venture between Quantum Information Services Private Limited (QIS) and Agora group. Equitymaster is a SEBI registered Research Analyst under the SEBI (Research Analysts) Regulations, 2014 with registration number INH000000537.

An independent research initiative, Equitymaster is committed to providing honest and unbiased views, opinions and recommendations on various investment opportunities across asset classes.

There are no outstanding litigations against the Company, it subsidiaries and its Directors.

For the terms and conditions for research reports click here.

Details of Associates are available here.

  1. 'subject company' is a company on which a buy/sell/hold view or target price is given/changed in this Research Report.
  2. Equitymaster has financial interest in Hero Motocorp and Bajaj Auto.
  3. Equitymaster's investment in the subject company is as per the guidelines prescribed by the Board of Directors of the Company. The investment is however made solely for building track record of its services.
  4. Equitymaster's Associates and Research Analyst or his/her relative doesn't have any financial interest in the subject company.
  5. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one percent or more securities of the subject company at the end of the month immediately preceding the date of publication of the research report.
  6. Neither Equitymaster, it's Associates, Research Analyst or his/her relative have any other material conflict of interest at the time of publication of the research report.
  1. Neither Equitymaster nor it's Associates have received any compensation from the subject company in the past twelve months.
  2. Neither Equitymaster nor it's Associates have managed or co-managed public offering of securities for the subject company in the past twelve months.
  3. Neither Equitymaster nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  4. Neither Equitymaster nor it's Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months.
  5. Neither Equitymaster nor it's Associates have received any compensation or other benefits from the subject company or third party in connection with the research report.
  1. The Research Analyst has not served as an officer, director or employee of the subject company.
  2. Equitymaster or the Research Analyst has not been engaged in market making activity for the subject company.
Definitions of Terms Used:
  1. Buy recommendation: This means that the subscriber could consider buying the concerned stock at current market price keeping in mind the tenure and objective of the recommendation service.
  2. Hold recommendation: This means that the subscriber could consider holding on to the shares of the company until further update and not buy more of the stock at current market price.
  3. Buy at lower price: This means that the subscriber should wait for some correction in the market price so that the stock can be bought at more attractive valuations keeping in mind the tenure and the objective of the service.
  4. Sell recommendation: This means that the subscriber could consider selling the stock at current market price keeping in mind the objective of the recommendation service.
If you have any feedback or query or wish to report a matter, please do not hesitate to write to us.