First US presidential debate in favour of Biden – bullish USD, bearish S&P 500?

October 01, 2020 13:30

After the presidential debate on Tuesday between Donald Trump and Joe Biden, many observers see a win for former vice president Biden.

While it certainly depends on which side you look at the debate from, we want to shine a light on it from a trading perspective and see whether we can learn something in terms of the S&P 500 and USD performance in the weeks ahead.

Only other US presidential debate on a Tuesday: in 2000 – a bad omen?

First of all, we'd like to point out a quite astonishing aspect, even though it might be more a coincidence: while the first presidential debate took place in 1960, and Nixon refused to participate in 1968 and 1972, the first and only presidential debate on a Tuesday took place in 2000 between Al Gore and George W. Bush jr.

As you may recall, 2000 was a disputed election. And this seems to reflect some aspects of the current presidential elections:

  • US president Trump has recently sowed doubt and uncertainty in the upcoming election
  • He has refused to commit to a peaceful transfer of power
  • He quickly nominated a new Supreme Court nominee, Amy Coney Barrett, after Ruth Bader Ginsburg passed away on the 18th of September.

In general, such an outlook is sowing uncertainty among market participants and is generally something we consider to be bearish for US equities and also the US-Dollar.

We should add that data shows that the US-Dollar statistically finds itself in a bullish seasonal window in the first 100 days after an election, regardless of whether a Republican or Democratic candidate wins.

In fact, if Biden's performance in the presidential debate on Tuesday results in a widening of his current lead in several polls over Trump and finally a win on the 3rd of November, the USD might be even better off, since the USD has gained on average 4% when a democrat wins, in comparison to only a 2% average gain when a republican succeeds (note: this is the picture you get from a FED trade-weighted nominal advanced foreign economies dollar index; the USD Index Future at the ICE does not paint such a clear USD post-election picture).

For Equities, the picture looks a little more complex:

  • The S&P 500 was up in April, May, June, July and August
  • The average return in the last four months of the year was around 7% and September was a down month at around 5%
  • October has been seasonally weak in US presidential years

From a statistical perspective, one could come to the conclusion that equities could take off after this US presidential election, seeing gains in the double-digit percentage point area.

The thing is: besides the already mentioned signs pointing to a dispute over the outcome of the election, a win from Joe Biden poses the threat of a drop in equities since he already made it quite clear that he will likely hike taxes, which could potentially cut 10 percentage points off earnings growth in 2021, if implemented.

How should you trade the S&P 500 in this difficult environment?

The overall picture in the SP500 CFD remains bullish as long as we trade above the SMA(200) and above 2,950/3,000 points.

Still, we shouldn't rule out a re-test of the region of the September lows, probably a stint to below and a test of the SMA(200) if a win from democratic nominee Biden materializes.

Since several US presidential election polls have seen Biden leading by quite a wide margin over Trump for quite a while and knowing about Biden's "tax plans" (though, that has mostly been priced into Equities by now) , we'd give long engagements a try and consider a short-term spike to below 3,000 points attractive from a risk reward perspective if we target a run up to 3,800 points:

Source: Admiral Markets MT5 with MT5SE Add-on SP500 CFD Daily chart (between May 17, 2019, to September 30, 2020). Accessed: September 30, 2020, at 08:00 AM GMT - Please note: Past performance is not a reliable indicator of future results, or future performance.

In 2015, the SP500 CFD fell by -0.73%, in 2016, it increased by 9.54%, in 2017, it increased by 19.42%, in 2018, it fell by -6.24%, and in 2019, it increased by 28.88%, meaning that in five years, it was up by 56.9%.

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