Election Years See Weak U.S. Stocks in October

Since the Democratic candidate Biden was reported to be involved in a scandal, he has not yet given a press conference to clarify what happened. Implicated by the scandal, Biden‘s approval rating has lost large ground in the latest polls, with his lead over Trump narrowing by just seven percentage points. With only two weeks left before election day, it is possible for Biden to see a defeat in the election and even be prosecuted unless he can take the situation under control and dispel voters’ doubts. This situation will send additional uncertainty to the presidential election and unsettle investors, drastically shocking U.S. stocks.

The analysis that U.S. stocks will gain more if Trump turns the table is prevailing financial markets, which is mainly based on the speculation that Biden has a good chance of significantly raising capital gains tax rates after coming to power. According to Biden's platform, he will increase the tax rate on capital gains to 39.6% from 20% for taxpayers earning more than $1 million annually. As a result, investors tend to be bearish on U.S. stocks if Biden wins out, considering Trump has been playing a positive role in stimulating the stock market. The concerns of financial markets come not only the presidential election but also the full control of Congress. Before the scandal revealed, polls had been showing that the Democrats could both regain power in the White House and take control of Congress. Now that Biden has been involved in the scandal, it is estimated that Trump will win the re-election, but the Democrats will take charge of the House and Senate. In this case, Trump will find the next four years extremely difficult.

Since the situation now is complicated and possible results are various, investors may either exit the market temporarily, waiting for more details, or deploy hedging strategies in advance. Previous statistics show that U.S. stocks see rise more often than fall in election years, but the past four election years (2016, 2012, 2008, and 2004) all witnessed an overall drop in U.S. stocks in October. Specifically, the stocks dwindled widely even in the second half of October, indicating investors of these years did not deploy their trades until the election results came in. Looking ahead, if the U.S. stocks continue to retreat in the next two weeks, the DXY and the Japanese yen will embrace gains, but gold will struggle in playing the role of a safe haven, considering the market performance since March that gold prices keep mirroring stock prices.

Notably, the negotiations between the EU and the UK are teetering on the brink, which may hamper the prices of GBP and EUR and put a premium on the greenback. This week, Trump and Biden will face off again on the morning of October 23 (Friday, GMT+8), and all eyes will be on whether Trump can make use of the scandal to turn the tide.