Tuesday’s U.S. presidential election is set to be an incredibly close race, with the outcome likely hinging on key swing states that could tip in either direction. This political uncertainty has traders, investors, and the entire financial world bracing for impact, as markets anticipate major shifts regardless of the result. With bonds, currencies, and cryptocurrencies expected to experience the biggest moves, why do elections trigger such intense market activity? Let’s explore how this pivotal event is primed to amplify volatility across asset classes and what traders and investors should be preparing for.
Historically, markets have reacted strongly to U.S. elections as traders and investors assess the likelihood of policy changes that could impact taxes, interest rates, and regulatory frameworks. In anticipation of these shifts, markets begin pricing in potential outcomes even before Election Day, leading to unusual spikes in buying and selling that, in turn, drive volatility. According to analysts, measures of implied volatility in U.S. Treasury and currency markets jumped sharply in October, with the ICE BofA Move Index, for example, rising by nearly two-fifths in just one month.
This anticipation isn’t limited to stocks but extends across asset classes. Early election results can make a significant impact on bonds and currencies, which trade continuously through the night, meaning that traders must be ready for fast-paced shifts as results unfold. Wall Street banks and hedge funds are keenly aware of this, going all out to ensure uninterrupted trading operations. Some institutions are even pausing software updates and booking nearby hotel rooms so that traders remain close to their trading floors. As Citi’s global head of credit trading, Vikram Prasad, put it, “We’re really coordinating across the entire organization” to prepare for election night.
A unique factor this time around is the increased depth and maturity of the cryptocurrency market, which wasn’t as developed during the last U.S. election cycle. Unlike traditional markets, cryptocurrencies trade 24/7, creating continuous opportunities for traders to react to the latest developments. In times of high volatility, crypto can act as a “shock absorber,” offering liquidity and flexibility during periods when traditional markets are closed. With more investors now involved in crypto than in 2020, this space could see swift and sharp movements as traders react to election outcomes in real-time. The global nature of cryptocurrencies allows traders worldwide to respond instantly to any changes in policy direction, particularly if the new administration’s stance suggests shifts in digital asset regulation.
Past U.S. elections offer some insight into what may unfold. In 2016, for example, markets initially dropped following Trump’s victory but rebounded sharply the next morning. This time, however, the rapid spread of news on social media and the use of real-time analytics tools may drive even faster reactions, with algorithmic trading systems primed to respond to any shifts in sentiment or breaking news.
As the U.S. election unfolds, markets are expected to react vigorously. This combination of policy uncertainties, round-the-clock trading in crypto, and widespread global interest will likely create a unique blend of volatility that traders must carefully navigate. By preparing for swift market movements and understanding the forces at play, investors can better position themselves to weather the storm and possibly capitalize on the opportunities that this uncertain time presents.
