What's going on?
The US stock market has gone down for nine consecutive trading days – its longest negative streak since 1980. Many investors are blaming political uncertainty as the US presidential election enters its final days – but it’s just one of many political risks for investors in the coming months.
What does this mean?
Markets tend to dislike political uncertainty. Investors generally feel they have the expertise to do things like buy the right stocks, but they aren’t as comfortable managing political risk – which, of course, can have a huge impact on the value of investments. Therefore, a high degree of political uncertainty tends to lead investors to sell riskier investments, like stocks, and buy ones that are perceived to be safer, like gold or government bonds. That’s exactly what’s been happening as the US presidential election nears and the polls have tightened.
Why should I care?
The bigger picture: There is a lot of political uncertainty on the horizon.
The US presidential election is just one political event in what could be a tumultuous next twelve months for markets. In early December, Italians will vote in a crucial referendum on reforms within their country – a defeat for the government would likely lead to early elections and even bigger uncertainty over the Italian banking system (yes, it’s complicated, read more here). Next year, German and French national elections take place amidst a surge in support for anti-European Union parties. The political foundations of the eurozone could face some significant challenges.
For the markets: Clearing the political air could be a very good thing for markets.
Quite a bit of certainty could emerge after a period of high uncertainty! With new mandates in place, the western world could have a reasonably strong political base on which politicians could do some significant economic good (e.g. implementing targeted government spending initiatives aimed at giving the economy an important boost). Of course, confusion and more uncertainty are also possible.