Podcast: Summer events and US election’s impact on financial markets

In this episode of the Saxo Market Call, John Hardy and Peter Garnry reflect on this summer's events that impacted the financial markets together with host, Søren Otto. Obviously, the US election with all its craze featured prominently. 

The political landscape has shifted dramatically, particularly with Kamala Harris replacing President Joe Biden as the Democratic candidate, alongside the assassination attempt on former President Trump. These events have had consequences, not just in politics but also in the markets.

Key market reactions

One of the notable market movements following these events was a brief surge in US small-cap stocks. This rally seemed to be driven by the perception that the Republicans, personified by former President Donald Trump, would likely win the election, which historically has led to policies favouring domestic industries and tariffs, boosting smaller companies that primarily operate within the US.

However, this may not have been solely related to election sentiment. The market environment during this period was complex, with several factors at play. For instance, algorithmic trading strategies and hedge fund activities might have contributed to the rally. There was speculation that some of these moves were driven by algorithmic trading systems quickly reacting to news headlines, pushing a large volume of futures contracts in the market, which temporarily inflated small-cap stocks.

This rally was short-lived, as broader market sentiment was impacted by a combination of these factors, along with economic data, global events, and technical market forces. While the initial reaction was significant, it quickly subsided, indicating that investors are still navigating through a complex landscape influenced by both political uncertainty and economic realities.

Sectors to watch

The political shifts have also led to speculation about which sectors could benefit or suffer depending on the election outcome:

Under a Harris administration:

Clean energy: Likely to see continued support and growth, with a strong focus on environmental policies.

Infrastructure: This sector could also perform well, although it may not be as heavily favoured as under a Trump administration.

Financials: Could face more regulation, which might dampen the sector’s performance.

Semiconductors: Likely to continue benefiting from bipartisan support for technological advancement and security.

Under a Trump administration:

US real estate: Could see benefits from Trump’s policies aimed at keeping interest rates low and his deep personal ties with the real estate industry.

Small-cap stocks: Likely to benefit from a pro-tariff, domestic-first approach.

Financials: Would likely thrive under deregulation, which is a cornerstone of Trump’s economic policy.

European defence: Could see gains due to Trump’s stance on NATO.

Potential risks

While the market has shown resilience, particularly with retail investors stepping in during dips, there are significant risks on the horizon. The primary concern remains whether the US is heading into a recession. If a recession does occur, especially with a portfolio concentrated heavily in technology stocks, investors could face severe losses. Diversification will be key to mitigating these risks.

Another major risk is geopolitical instability. With increasing tensions in various parts of the world, particularly in the Middle East, the impact on global markets could be severe and unpredictable. Investors should consider adding exposure to sectors like defence, which might offer some protection against geopolitical shocks.

Looking forward

As we approach the US election, the markets will likely remain volatile, with investors closely watching both the political developments and economic indicators. The presidential debates and upcoming economic data releases will be crucial in shaping market sentiment. Investors should prepare for a bumpy ride, with a focus on diversification and a clear understanding of the risks associated with different political outcomes.

To catch the full discussion and gain deeper insights into the summer's market movements, listen to the complete podcast at the top of the page.