As one of the most important events this year, the upcoming U.S. presidential election is just a few days away. For Wall Street, the showdown between Harris and Trump has added more volatility to the market, while uncertainties such as interest rates, labor market, conflicts in Europe and the Middle East have been tormenting investors enough.
Although the two candidates' poll support rates are almost neck and neck, so far this uncertainty has not caused much trouble for investors. The S&P 500 index has hit historical highs 47 times this year. After this election, the stock market may see another wave of growth, just like in previous elections.
Predicting the election results is actually similar to flipping a coin, making it difficult for traders to bet on what is about to happen. Perhaps this is also one of the reasons why sites like PolyMarket and PredictIt are so interested in this. Goldman Sachs has been tracking the index corresponding to trading strategies of both parties winning, showing that the index tracking the Republican victory trading strategy has been rising since the end of September, while the index tracking the Democratic victory has been falling.
What does the election year data indicate?
Overall, election years are beneficial for the U.S. stock market. Since 1960, the S&P 500 index has risen in almost every election year. The exceptions were only in 2000 and 2008, when they were affected by the bursting of the dot-com bubble and the financial crisis, respectively. Looking at recent election cycles, the records seem even better. In the last three election years since 2008, namely 2012, 2016, and 2020, the benchmark index has risen by at least 10%.
If only the last 7 months of election years are considered, the situation is similar. According to the data and analysis from the Stock Trader’s Almanac, since 1950, in 18 election years, the S&P 500 index has risen in the last seven months in 16 years. The stock market fell in 2000 because the election results took 36 days to be announced. Another exception was in 2008.
As for the impact on bonds and USD exchange rates, there is no clear trend in election years. Taking the USD index, which tracks the USD against major currencies, as an example, in the past six election years, the index rose for three years and fell for three years.
Is it difficult to predict the outcome of the election?
It is quite likely that the outcome will not be clear until long after the election day. Experts also mentioned the possibility of disputed or closely contested election results, which could increase volatility in various assets, even disrupting the hot stock market rally.
In 2000, when Florida recounted the votes, the S&P 500 Index fell by more than 4%, the yield on 10-year US Treasury Bonds dropped by 52 basis points, and the price of gold surged as investors flocked in.Its price has soared to a historic high, closely related to market expectations of interest rate cuts by the Federal Reserve.and increased significantly.
If the election becomes protracted or leads to political violence, investors will face risks. It is anticipated that the stock market will decline, especially in situations with uncertain final results.
What does the 'Fear Index' indicate?
Any significant events that could impact the economy and disrupt the market may cause trading volatility, and elections are no exception. The futures curve of the Cboe Global Markets Volatility Index (VIX), also known as Wall Street's 'Fear Index,' historically shows a rise in the index leading up to election day, with a decline only after the voting concludes.
Barclays strategist stated that options positioning data indicates traders expect the s&p 500 index to increase or decrease by 1.8% on November 6, the day after the US election.
Similar to the stock market, bond prices usually experience increased volatility before the election and return to calmness post-election. The market's fear indicator MOVE index has averaged a 4-point increase in October and a 7-point decrease in November during each election year since 1988. Harley Bassman, managing partner of Simplify Asset Management, mentioned that the options market indicates investors expect US treasury bonds to fluctuate by about 18 basis points after the election ends.
Key issues facing investors
Taxation
Trump previously stated he would reduce the corporate tax rate from the current 21% to 15% and vowed to make the Republican's 2017 comprehensive tax law permanent, while advocating to extend key provisions of the law. On the Democratic side, Harris plans to increase the corporate tax rate to 28%. She proposes maintaining current tax rates for taxpayers with annual incomes below $400,000 and raising the tax rate levels for higher-income individuals.
Immigration
Trump has stated that he will deport undocumented immigrants, while Harris expressed support for an immigration deal that includes building more barriers on the southern border of the United States. JPMorgan strategist believes that any effective measures to restrict immigration that result in a serious labor shortage could potentially become a driving factor for inflation.
Assets to watch if Harris wins
Stocks:
Harris' victory is expected to benefit renewable energy producers, electric vehicle manufacturers, and even utility companies.
The Democratic Party's positive stance on clean energy means that Harris' victory is good news for companies in this industry, including electric vehicle manufacturers (Tesla, Rivian, Lucid). Stocks of electric vehicle charging network operators and battery manufacturers, as well as solar energy companies, are also expected to perform better.
Residential builders may also receive a boost. Harris proposes to provide up to $25,000 in down payment support for first-time home buyers, and suggests offering tax incentives for developers of new homes.
Cannabis stocks typically perform well during Democratic administrations, stocks worth watching include Tilray Brands Inc., Canopy Growth Corp., Curaleaf Holdings Inc., among others.
Given the Harris administration is expected to continue strict regulation of the financial industry, the performance of financial stocks may not be as good. Pharmaceutical companies may also face regulatory pressure, as Harris proposes annual out-of-pocket prescription drug expenses not exceeding $2,000.
Bonds:
Whether it is Trump or Harris, neither has shown willingness to control US debt, which will exert pressure on long-term bond prices over time. However, according to a September survey of Bloomberg terminal users, Harris' impact on the bond market is minimal.
Forex:
Fidelity strategist Aroop Chatterjee stated that under the Harris administration, reduced uncertainties in trade, immigration, and foreign policy could put pressure on the US dollar as a traditional safe haven currency. Analysts at Convera suggest that a Democratic win in the White House and Congress may lead to increased social welfare spending, potentially weakening the USD exchange rates.
Assets to Watch If Trump Wins
Stocks:
If trade tensions escalate, companies with significant overseas revenue may face disruptions in their operations. This includes chip manufacturers NVIDIA, Broadcom, Qualcomm, material and industrial firms.
Oil, natural gas, and traditional energy companies are seen as potential beneficiaries of a Trump victory, as the Republican candidate has pledged to relax restrictions on domestic petroleum extraction. Stocks to watch include Baker Hughes, Exxon Mobil, ConocoPhillips, and Chevron.
If Trump takes office, clean energy and electric vehicle companies that benefited from Biden's inflation-reduction bill will face challenges, as Trump has said he will completely overturn Biden's electric vehicle policy. If Trump revokes tax incentives for electric vehicle buyers, risks may arise for Tesla, Rivian, Lucid, battery manufacturers, and component suppliers.
Cryptocurrency stocks have long been viewed as an alternative indicator of the "Trump trade," as the former U.S. president has made a 180-degree turn in his attitude towards Bitcoin and other digital assets, even promising to make the U.S. the "crypto capital of the world." Stocks worth watching include Coinbase Global Inc., Marathon Digital Holdings Inc., Cleanspark Inc., and others.
If Trump and his running mate J.D. Vance win, the stock prices of two media companies may rise. They are the parent company of Truth Social, Trump Media & Technology Group Corp., and Rumble Inc.
Bonds:
The strategy of betting on long-term bonds underperforming short-term bonds gained popularity after Biden's poor television debate in June, and remains an attractive bet. If the Federal Reserve lowers interest rates, this strategy will gain more momentum.
Forex:
Wall Street strategists generally believe that a Trump victory will at least in the short term support the dollar and weigh on currencies like the euro and Mexican peso, but Trump himself thinks the world reserve currency exchange rate of the dollar is too high. How he balances these conflicting ideas is still to be observed.
