With just four days to go until the US presidential election, investors across the world are nervous about the result. Although Hillary Clinton is ahead in the opinion polls and looks the more likely victor, there's still a chance that Donald Trump could win. Therefore, investors are likely to be pricing-in the possibility of a Trump win, but the probability of a Clinton victory.
This means that if Clinton wins, there's likely to be a relief rally in the FTSE 100 and other stock markets across the globe. That's because she's seen as a status quo candidate in terms of being a continuation of the current administration. That's not to say that she will keep all policies just as they are, but rather that her approach to being President is unlikely to be as radical as that of Donald Trump.
However, a relief rally may be somewhat limited and short-lived if Clinton wins. She faces a difficult term as President, since it seems likely that the Republican Party will control both the House of Representatives and the Senate. This could make it difficult for Clinton to push through the change and the policies she wants to in the next four years. As such, the reality of what could be argued to be an ineffective government may start to sink in very quickly following a relief rally in the FTSE 100.
Following a Clinton victory, there's unlikely to be an extended honeymoon period for the FTSE 100, since investor attention will turn to the other risks and challenges the global economy faces. Chief among them is a US interest rate rise, which is more likely than not going to occur in December. This has the potential to not only end a relief rally following the election, but to push the FTSE 100 downwards by a few hundred points.
After all, the last time the Federal Reserve raised interest rates it caused a major fall in the value of the FTSE 100. Although another rise won't represent a step change in policy from the Federal Reserve, it does bring the risk that a tighter monetary policy will choke off the US economic recovery. It also means that the global deflationary pressure that has become a feature of recent years may find it easier to gain traction in the US.
Following the election and a potential interest rate rise, Brexit is likely to be an even bigger challenge for the FTSE 100 to overcome in 2017. Once negotiations start, uncertainty regarding the UK's economic performance is likely to increase and if negotiations don't go smoothly, doubts could begin to emerge among business leaders and investors regarding the UK's long-term outlook.
This is likely to provide a buying opportunity for patient investors, since high quality companies may be on offer at discounted prices. Therefore, even if there's a short, sharp relief rally following a Clinton victory on Tuesday, there are likely to be a number of buying opportunities in the coming months.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.