How the U.S. Presidential Election Will Affect Trading

The U.S. presidential election is only 3 months away and with that comes the realization that the outcome of the election will potentially have a dramatic effect on investors.  The election will not only have an impact on the economic situation in the U.S. but also on the market and trading environment for many investors.  The candidates are complete opposites in terms of their positions on several important issues like government spending, taxation and healthcare and the result of the election will have a long-term influence in investors and businesses alike.

The History of Brokerage Industry

The effects of the election will never been seen more clearly than in the brokerage industry.  There is still much debate around Wall Street in terms of the controversies like the LIBOR scandal and Wall Street’s responsibility in the financial crisis and there is no doubt that the results of the election will affect the big-time Wall Street companies as well as the discounted brokerage firms.  There have been many changes that have taken place in the brokerage industry over the past 4 years.  Banks like Morgan Stanley and Goldman Sachs were set apart from traditional banks like Citigroup and Bank of America before the financial crisis as they focused more on investment activities.

However, the failure of Bank of America’s attempt to buy-out Merrill Lynch indicated the weakness of some investment banks and as a result, Morgan Stanley and Goldman became bank holding firms.  This has made them subject to banking regulations and has hindered their ability to use leverage in return for access to capital.  Since that time, many Wall Street brokers have lost their competitive edge and both Morgan Stanley and Goldman have been struggling to get any gains since 2008.  Additionally, discount brokers like E*Trade Financial and Schwab have experienced the same struggles as Schwab was trading below the levels in 2008 during December 2011.

The U.S. Presidential Election and the Future of the Brokerage Industry

Traditionally, U.S. presidential election years generally have a positive influence on stocks.  In this type of election, where a Republican is running against an incumbent Democrat, stocks have a tendency to show positive returns regardless of who wins the election.  However, stocks do tend to drop if there is prospect of increased regulation or taxes.

There are several recent events that have further divided the political parties’ positions on investment banks and brokers.  Occurrences like Morgan Stanley’s Facebook IPO mishap, JPMorgan’s trading disaster and the LIBOR scandal that involved Barclays and several other banks strengthen the belief that additional regulation is needed to monitor financial institutions.  However, because of the structure of Congress, new regulations will probably not have a meaningful effect no matter who is president.  Of course, that does not mean that the presidential election will have no effect on the brokerage industry.  A broker’s success largely depends on 2 factors: the need for interest margins on broker balances to generate greater profit and the belief of potential customers that investing will generate profit for them.

The Republican Contender

Mitt Romney has many ties to the private business and equity world so the election could be a referendum on Wall Street.  If this is the case, President Barack Obama’s re-election would suggest a lack of faith in financial institutions and would put a damper on brokers’ ability to operate.  On the other hand, a win for Romney would give brokers on Wall Street more latitude and would probably result in more attempts by brokers to draw customers back into the markets.  It is uncertain which election outcome will create more economic growth, optimism, profits and higher interest rates for investors.  However, there is a clue from the tax policies of the candidates as the lower rates of Romney’s policy would encourage investment and the higher rates of Obama’s policy would discourage it.

After the election, the best occurrence for brokers will be economic growth.  Unfortunately, when many areas of the government are divided on party lines, the likelihood of gridlock may stunt any economic growth regardless who becomes president in November – an occurrence that could affect brokers’ for years.  It is clear that no matter what the outcome is, the election will have a significant impact on the brokerage industry.