Election Cycles and Investment returns

Arguably the most important election for the global economy will be in the USA in early November. With the Democrats fielding a new candidate after Biden’s withdrawal and the attempted assignation of Donald Trump at a rally in mid-July, this US election cycle has already created history like few that others that preceded it. 

Octagon believes that markets price in elections in a similar way as they do about most other new information – be it economic, political or geopolitical. Investors in both equities and fixed interest watch news and developments every day. They take that incremental piece of news, add the data and the chances of it happening to their current view and make changes to the likely future outlook for the assets they invest in.

When it comes to elections, as with most pieces of new information, it is the “surprise” element of the news that has the biggest short term effect on markets. While an assassin’s bullet would have been both shocking and surprising, perhaps the best illustration of a surprise that jolted markets was the most recent French election and how it compared with the UK election just a few days later.

The market did not expect a snap French general election to be announced in early June. Both French equity (minus ~6%) and fixed interest markets (minus ~2%) moved materially in the few days after the election was called as investors changed their views of possible future outcomes. In the following weeks markets gathered more data every day and as of the first week of July, both French equity and bond markets had recovered about half their losses. Surprises keep being delivered as odds of a left or right-leaning government change, but their impact on asset prices are reduced as investors build this new information into their future price expectations.