One of my favourite James Bond movies was Pierce Brosnan’s first, Goldeneye (which also produced one of the greatest video games of my childhood). During a time of heightened political volatility, is it time to have an eye on protection such as gold? Should we all have a Goldeneye right now?

Entering 2024 it was expected that geopolitics could play a large role in determining the path for markets. Although the election calendar was very dense, we hadn’t seen any major market disruptions due to these risks. All was relatively smooth until the snap election was called in the U.K., catching many by surprise. Not to be outdone, the French said “hold my Champagne flute” and launched into their own identity changing election. The U.S. election cycle took a huge leap forward with the first presidential debate followed by the attempted assassination of former President Trump.

So how do U.S. elections impact markets and how can investors be best prepared for the potential market disruptions?

Generally, the rule of thumb for the U.S. election is that the market doesn’t really respond until around 60 days prior to the election date. That would mean that around early September, the markets would seem to care more. As the chart below from Alpine Macro shows, in a typical U.S. election year, the implied volatility (think of this as the cost of insurance) starts to escalate rapidly in the 10 weeks leading up the election. This is more a statement around market participants demand for hedging and their uncertainty concerns.

However, the events this week point to a reduction in the uncertainty around the conventions, nominations and momentum. It looks like Trump is destined for a second stay at the White House and it’s probably best to start thinking about how to position portfolios for this. The opportunities and risks for portfolios from a Trump re-election include:

• Fiscal – it is unlikely that either Biden or Trump would attempt to pullback on any government spending. Therefore, we can expect a continued issuance of U.S Treasuries into a weak demand backdrop. This would imply owning less interest rate risk (duration) and other stores of value (gold)
• Trade – Trump’s platform (as it was for his first term) was very much pro-America and anti-trade. His election would likely lead to noise around tariffs and trade alliances. It would also mean a supportive environment for U.S. domestic production. In portfolio terms this would mean being long industrial sectors and less focused on Chinese equities
• Energy – Trump has commented that he would like to see increased domestic production of energy. This would be a bearish indicator on the price of energy but could mean a production and therefore profit led boom for the suppliers
• Monetary Policy – Trump quickly politicized the rate situation, saying “It’s something that they know they shouldn’t be doing,” regarding cutting rates before the election. Trump clearly would prefer a low-rate environment but during his presidency

The markets have already begun to take this lead and have been differentiating rewards to different segments and sectors. The rotation we have seen in the last week within equity markets has been quite vicious with leadership being tested, while real estate, industrials financials and resources have been clear winners.

The next few months could show relative calm on the surface of markets but under the hood rotation and dispersion could be the real story.