U.S. election enters final stretch: How could investors respond?

The highly-anticipated U.S. presidential election will officially kick off on November 5, potentially setting the stage for a whirlwind market environment. As the countdown begins, investors are bracing for heightened volatility. In this post, we explore the potential implications and strategies to consider.

As October unfolded, Harris's lead in mainstream polls began to narrow, even disappearing in key swing states. Betting platforms like Polymarket have seen a surge in wagers on a Trump victory.

DJT is the parent company of Truth Social, and Trump retains a 57% stake, making it broadly seen as the quintessential Trump-related stock. Following the Capitol riots in early 2021, Trump was banned from mainstream media platforms and turned to Truth Social.

Additionally, Trump's running mate, Republican vice-presidential candidate J.D. Vance, is a shareholder at RUM. Phunware provided mobile app development and data analytics services for Trump's 2020 presidential campaign.

Beyond equities, a stronger dollar, rising U.S. Treasury yields, and Bitcoin's surge also appear to echo the "Trump trade". According to the Financial Times, this might reflect expectations of Trump's inflationary policies, such as aggressive tariffs and immigration crackdowns.

However, despite shifts in polling data, market expectations may already be priced in. Polymarket, as of October 30, shows Trump leading significantly (66.3% vs. 33.7%), while RCP's data indicates a tight race (48.6% vs. 47.6%).

On October 30, without significant changes in polling data, DJT experienced a sudden sell-off, plummeting over 20% in a single day.

Trump's policy proposals emphasize a conservative stance, focusing on "America First," economic protectionism, strict immigration controls, tax cuts, deregulation, and a skeptical attitude towards clean energy development.

If Trump returns to the White House, sectors like infrastructure, traditional energy, finance, and pharmaceuticals could benefit.

Kamala Harris, on the other hand, embodies Democratic policies, such as promoting clean energy and electric vehicle industries, supporting international cooperation in foreign and trade policies, and advocating for the legalization of marijuana, allowing states to decide its legality.

In a neutral risk scenario, lower implied volatility means lower premiums, theoretically favoring option buyers. If you anticipate rising volatility before the election, without a clear direction, consider constructing a long straddle or long strangle when volatility is low. Alternatively, you could leverage volatility crush by short straddle or strangle when volatility is high.

The volatility analysis tool on moomoo can help assess current volatility levels. Go to Stock Details > Options > Analysis > Volatility Analysis.

Implied volatility values alone don’t tell the whole story because asset characteristics vary. Using the volatility analysis tool can help you gauge the current volatility level, giving you a clearer picture of the target asset's overall volatility instead of just focusing on a single option.

For a better perspective, compare the target's performance over the past year. IV Rank shows how the current implied volatility compares to past values, while IV Percentile indicates the percentage of trading days when implied volatility was lower. A smaller number suggests that current implied volatility is relatively low.

Who will win the election? How will the results affect my holdings? These are pressing questions for many investors. However, according to Morningstar, these questions might be misguided. Making investment decisions based on broad, sweeping predictions that can easily be wrong is unwise and dangerous.

Election trades typically unfold in three phases: pre-election shifts in perceived advantages, post-election surprises, and the impact of policy implementation on trade continuation or reversal. Each phase carries significant uncertainty, and factors like congressional election outcomes, policy agenda execution, and market expectations add complexity.

After Trump's 2016 victory, investors anticipated domestic-focused sectors would benefit from deregulation, tax cuts, and protectionism, leading to rallies in financials, basic materials, energy, and industrials. Meanwhile, Trump's perceived hostility towards Silicon Valley led to an initial tech sell-off. Yet, during Trump's presidency, tech stocks became the best-performing sector, highlighting the dominance of market forces.

Morningstar analysts assert that while markets may perform better or worse under different presidents, the long-term trajectory is almost always positive. As a result, investors who remain calm and laser-focused on their goals will probably end up in a better place than those who attempt to shift their portfolios based on election headlines.