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2016 Election Raises Uncertainty In Already Uncertain Times

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The 2016 election is wreaking havoc on the markets and will probably continue to do so months, even after the next U.S. president has been named. Unfortunately, the uncertainty caused by the election is being ratcheted up further by global and national macroeconomic forces that signal only one thing: more volatility ahead. However, history does have some lessons that could suggest what could lie in the markets’ near future.

Also analysts have plenty of views about what the election of either of the two current frontrunners could mean for the markets.

What history tells us about presidential election years

Barclays equity strategists Keith Parker and Jonathan Glionna expects the 2016 election to bring a rise in uncertainty related to policy, although truly this is something we have already seen. This is especially true in areas like the Pharmaceutical sector, which Democratic frontrunner Hillary Clinton has been targeting.

Parker and Glionna said in a report dated June 2 that historically, the S&P 500 has declined by 2% to 4% between July and November in years when a president is exiting after serving more than a single term, except for in 2008.

They link this decline to the increase in the equity risk premium, which happened in all but one time.

2016 election

Looking at other election years, the S&P 500 has soared by 7% on average through the second half of the year in other election years.

They added that the general business cycle can actually explain a lot of this decline, although they expect the 2016 election to increase the headwinds on equities, especially as investors see the likelihood of Republican frontrunner Donald Trump winning the presidency. They based this prediction on the decline in S&P futures following his win of some of the most important state primary elections.

2016 election amps up uncertainty even more

Further, the Barclays team notes that the selection of “two unpopular candidates” as the likely nominees for the two major parties has come seven years after the last recession and during a tightening cycle by the Federal Reserve, which only serves to increase the pressure on and uncertainty in the equities market.

They add that in the event that Clinton or Trump end up being elected, there are different areas that could be impacted, depending on which of them lands in the White House. Parker and Glionna see Trump as being the “more uncertain comment based on his comments made throughout the primaries – on trade, immigration, large tax cuts, debt, currency manipulators and Fed (to name a few).” Indeed, this is also a widely held view and echoes comments made by others, such as PIMCO’s Libby Cantrill, who outlined why investors see Trump as such a wildcard.

They note that when the GOP holds its convention the week of July 18-21, investors will get a better idea about which direction Trump’s campaign will move in and how much some of his past rhetoric might be overlooked by the markets.

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