There are just 13 days to go until the US Presidential election takes place. It has been perhaps the nastiest election in living memory, but also one of the most uncertain. Despite negative news coverage in recent weeks, Donald Trump is still only 4% behind Hilary Clinton according to the five most recent polls. This means that the result isn’t yet a foregone conclusion, which adds greater uncertainty to the outlook for investors.
Of course, some investors may be hoping for a Clinton victory, others for a Trump win. However, whoever wins will bring a period of considerable uncertainty for the US economy. That’s because both candidates are seeking to make changes to the status quo. For example, fiscal policy is likely to change and this has the potential to alter the future direction of the US economy.
Since it’s the biggest economy on earth, this matters a lot to investors. It would therefore be unsurprising if share prices in the run up to and in the aftermath of the election became increasingly volatile. In fact, a modest fall in the FTSE 100 and other global indices could take place as investors may become increasingly risk-averse.
There are always risks
However, the fact remains that investors continually face a number of major risks. Some of them are known, while others come out of the blue and take the market by surprise. In the case of the US election, it’s likely to cause a bump in the road for investors due to the uncertainty it brings. But the idea of selling up whenever the global economy faces a risk that could cause a bear market would mean avoiding shares most of the time.
Despite this, there’s a risk ahead that could have a significantly negative impact on share prices. US interest rates are likely to increase before the end of the year. Last time they were raised, the FTSE 100 and other global indices endured an incredibly rocky period that sent their valuations downwards. This time around may not be as brutal, but the second rate rise could still be painful in the short run and cause paper losses for investors.
However, events such as an interest rate rises and a subsequent fall in share prices represent opportunities, rather than events to fear. They allow investors to buy high quality companies at even lower prices. This increases their potential rewards, but also reduces downside risk since an expectation of bad news is already somewhat priced-in.
Certainly, buying during such periods means that paper losses may be encountered in the short run. Therefore, investors must be able to stomach further falls after they’ve made purchases. However, in the long run the rewards can be stunning. As such, the US election and a US interest rate rise should be seen as opportunities to profit, rather than events to avoid through selling up and walking away.