How the US election is moving markets: four essential charts explained
As the race for the White House intensifies we look at the performance of gold, US healthcare stocks, the dollar and the volatility index to see who the market is backing for US president.
The US election is another potential inflection point for markets in what has been a turbulent 2016.
The polls have narrowed and the bookmakers in the UK have slashed the odds on a Donald Trump win, but what are financial markets telling us?
We look at four essential charts: gold, the S&P 500 healthcare index, the dollar and the volatility index. We explain their importance in gauging who the market thinks will win the 2016 US election.
Why is it important?
Gold is the traditional “safe haven” – it is seen as a safe store of value in times of economic stress. Therefore investors buy gold to protect their capital when they feel uncertain about the future.
What is the price of gold telling us?
The price of gold is $1,293 per ounce, lower than the $1,366.33 peak it hit following Britain’s vote to leave the European Union, but well above the 2016 low of $1,061.44.
Investors have been buying up gold all year as first emerging market worries, and then Brexit and now the US election have heightened uncertainty among investors.
In recent weeks, following a slight fall in the aftermath of Brexit, gold has been rising again. In particular, the price of gold has picked up as the gap in the polls between Hillary Clinton and Donald Trump has closed.
Why might gold rise?
There is lingering uncertainty over how Republican nominee Donald Trump’s policies may affect asset prices. That uncertainty might force investors to hoard their cash in gold and take money out of riskier assets, such as shares.
Why might gold fall?
Democratic nominee Hilary Clinton is viewed by some as a president unlikely to rock the boat and continue a lot of the previous regime’s policies that have been beneficial to riskier assets such as shares.
US healthcare sector
Why is it important?
The affordability of healthcare in the US is a big issue. A vote for Clinton would be a vote to expand the Affordable Care Act (also known as Obamacare). A vote for Trump could see Obamacare quashed. Separately, Clinton has also pledged to control drug pricing.
What is the healthcare index telling us?
The S&P 500 healthcare sector is at 771.3 (as at 3 November 2016). That is above the February low of 733, but off the post Brexit high of 871.3.
The value of the healthcare sector has been falling since a spike triggered by the Brexit vote (healthcare stocks are considered “safe haven” shares).
However, the decline in the sector has picked up pace in the last month and is heading back towards the year’s low, which could indicate that investors are hedging their bets towards a Clinton win.
Why might healthcare stocks gain?
If Trump wins the election he has said he will ask congress to convene a special session so he can “repeal and replace" Obamacare, which could come as a relief to pharmaceutical companies who would be expected to carry much of the cost should Obamacare be expanded.
Why might healthcare stocks fall?
Clinton has vowed to defend and expand the Affordable Care Act, which could come at a cost to the pharmaceutical industry, and introduce controls on drug prices
Why is it important?
The dollar is the world’s “reserve” currency. Commodities are priced in dollars and most of the world’s major deals are struck in dollars. It is also considered a safe haven during uncertain economic times.
What is the price of the dollar telling us?
Against a broad basket of currencies and the Mexican peso (which has been impacted by Trump’s well publicised comments) the dollar remains strong, but against Japan’s yen, an alternative safe haven, it remains near long-term lows.
Why might the dollar rise?
A Clinton win may be seen by investors as maintaining the status quo, which potentially clears the path for the Federal Reserve (Fed) to raise interest rates, which makes the dollar more attractive.
A Trump win could see the dollar strengthen against the peso.
Why might the dollar fall?
A Trump win could trigger a wave of uncertainty in the market. It is unclear how that would impact the Fed’s monetary policy. Given the dollar has been strong recently it could lose ground against the safe haven yen and even the British pound, which has been weakened by Brexit.
Why is it important?
The VIX, otherwise known as the fear index, is a gauge of investor sentiment.
If the index is rising, as it did in January during China’s currency crisis and in June when Britain voted out of Europe, it suggests that investors are preparing themselves for a market-moving event.
What is the price of the VIX telling us?
It is rising again. The spike in the VIX has coincided with the race for the White House getting tighter. However, in comparison to the spike at the start of 2016 on concerns over emerging markets and in June following Brexit, it is still relatively subdued, which suggests the market is still backing a Clinton win.
Why might the volatility index rise?
The tighter the polls get the more volatility will likely rise. A shock win or defeat either way, as with Brexit, could also cause the volatility index to spike.
Why might the volatility index fall?
Should Clinton extend her lead in the polls then volatility would be likely to fall.
The market remains relatively tranquil. There are few signs that investors are bracing themselves for an imminent shock. As with Brexit that confidence could be misplaced.
But while the bookmakers have been slashing the odds on the prospect of a Trump win, many still believe that Clinton will triumph. That is a view that seems to be reflected in the market.
The views and opinions contained herein are those of Schroders and these views are intended only for illustrative purposes. Performance stated reflects past performance, which is no guarantee of future results. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of any overseas investments to rise or fall. Performance is based on unmanaged indexes, and an investor cannot invest directly in any index. Not intended to serve as an individual investment recommendation or research. Please discuss any investment considerations with your financial advisor.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.