2024 World Elections: Lessons For New Traders

2024 has been a banner year for elections, with 40 countries around the world holding polls to make major decisions about their future leadership, including the US, UK, Taiwan, India, as well as the EU.

The countries that held elections this year contain about half the world’s GDP as well as nearly half of the global population - you can imagine how much power these events had to affect the markets.

Drawing on examples from this year’s polls, what lessons can traders take away from 2024’s election year?

Lesson #1: Get in early

Markets are forward-looking. Today’s price movements of different assets reflect how analysts expect those assets to perform in the future, based on the latest information.

For example, markets began pricing in a victory for Donald Trump in the US presidential election several weeks before voting even took place. Both the US dollar and Bitcoin started climbing early in October - the rising price of Bitcoin in the run up to the election in particular might reflect traders’ predictions that Trump would win, given his outspoken support of the cryptocurrency on the campaign trail and in previous speeches.

Traders who bought Bitcoin, US stocks, or the dollar before the election would have made bigger profits by buying before the price rose significantly after Trump’s win was confirmed.

The risk here is that while traders have the opportunity to profit based on their predictions of what will happen, there is always the chance that they might predict incorrectly, leading to losses instead of profits as asset prices decline.

Lesson #2: Focus on the economy

Markets reward candidates who are perceived to be better stewards of their respective economies.

When Narenda Modi won the election in India, the country’s stock market rallied by as much as 23.5% in the four months after the elections wrapped up. And that’s despite an initial drop due to his party failing to win an absolute majority. Modi’s policies are perceived as pro-growth and pro-business. Similarly, Trump’s victory in the US election pushed the S&P 500 stock index to new record highs due to the optimism surrounding deregulation and tax-cuts.

On the other hand, when Lai Ching-te won Taiwan’s election, stocks fell. The president is seen to be antagonistic towards China, and investors thought that if he does take a confrontational approach in dealing with Beijing, this might put downward pressure on Taiwan’s economy. They reacted by selling off stocks.

And in the UK, the Labour party’s victory did not seem to have much impact on the stock market at first - but the party’s first budget statement in October actually gave midcap and smallcap stocks a small boost, as investors decided the economic policies shared might not be as punitive on businesses as some had expected.

Lesson #3: Markets don't like uncertainties

Political and economic uncertainty has a major impact on many different markets.

France’s President Emmanuel Macron decided to dissolve parliament and call an early election in June, a move that caught markets off guard. In response, French stocks plummeted, with the CAC 40 index experiencing its worst week since March 2022. On 5 December, the French prime minister Michel Barnier lost a vote of no confidence issued by the country’s parliament.- All this political chaos has resulted in the CAC index still nursing a year-to-date decline as of December 6th, in stark contrast to the double-digit gains for other major stock indexes across the US, Europe, and Asia so far this year.

The German government crisis, in which the coalition between the FPD, SPD and The Greens has collapsed, is expected to continue to affect both Germany’s DAX stock market and the price of the Euro on the Forex market going into 2025.

Lastly, South Korea’s President Yoon Suk Yeol imposed and then lifted martial law on 4 December, leading to South Korean stocks falling as well as destabilising the won-dollar exchange rate. The won fell to a two-year low against the dollar initially, before recovering some of its losses.

While falling asset prices is usually bad news for traders and investors, with CFDs, traders can still profit as an asset’s value drops. A Contract for Difference allows traders to speculate on whether the price of a certain asset will rise or fall.

Lesson #4: Understand the power of sentiment

Investor sentiment can be a highly influential factor in how asset prices change in the run up to or aftermath of an election.

Headlines about a candidate or a party’s policies being pro-business or pro-market, or predictions about what they will be like as a leader, might amplify market movements. As well as information shared by journalists, speculation among investors on social media might have the same effect.

Election results can spark trends that spiral out into overreactions - if retail traders get swept up in one of these trends, they might find that the market quickly reverses its position, potentially leaving them out of pocket. Seasoned traders who assess fundamentals and think long-term might be able to exploit these trends, for instance by correctly predicting that an asset that dips might rally again afterwards, making the dip an ideal time to buy.

Lesson #5: Elections are not the whole story

Elections can spark volatility, but the effect on the markets tend to have a limited shelf life.  Long-term trends and broader economic fundamentals will have a greater impact, unless the incoming government dramatically alters the course of the economy and fundamentally changes how it operates

After an election, the outcome becomes less of a factor over time in how the markets perform, with macroeconomic factors like interest rates and inflation taking over. US stock markets surged initially after Joe Biden’s presidential win in 2020, but in the long-term, the bull run that followed was influenced more by AI-driven profits and Fed rate cuts in the US than by political factors.

Traders and investors would be wise to consider all timeframes when managing their portfolio.

While adopting a broader and longer-term view of markets is certainly prudent, traders and investors would do well to stay ready to react to short-term reactions across global financial markets.

After all, elections don’t happen every day. Hence, the scarcity of market opportunities tied to elections could be too good to miss out.

Still, even if you missed out, there’s bound to be more trading and investing opportunities in the post-election years.
 

Conclusion

While elections and political events can have a real impact on the markets, these effects are not always easy to predict - and once they seem to be a ‘done deal’, there is less opportunity for traders to profit.

Traders who get in at the right time might stand to profit from the short-term volatility of an election, if they keep their wits about them and exercise proper risk management. Like any major risk event, elections can lead to volatility, and traders can mitigate losses by diversifying their portfolios.

However, over-diversifying in an attempt to limit loss can sometimes also dilute returns. It’s a balance between holding a diverse range of assets, and making sure that the portfolio is performing as efficiently as it can.