Stocks Rise as Traders Map Out Election Game Plan: Markets Wrap

(Bloomberg) -- Stocks rose at the start of the busiest week for corporate earnings, with traders also gearing up for the US election and key economic data that will set the stage for the next Federal Reserve decision. 

Most major groups in the S&P 500 gained, though energy shares joined a slide in oil. Crypto companies surged, with Bitcoin up about 3%. Trump Media & Technology Group Corp. soared 22% as retail traders touted the stock after Donald Trump’s high-profile event in New York Sunday. The company has traded like a proxy for sentiment of his perceived chances of returning to the White House, with recent moves more correlated with betting markets as opposed to actual polling. Conservative video network company Rumble Inc. climbed 14%. In late hours, Ford Motor Co. dropped after trimming its profit forecast.

A victory for Trump would be more beneficial for stocks and Bitcoin relative to his Democratic opponent, while a Kamala Harris presidency would bring slightly more relief to housing costs, according to a Bloomberg Markets Live Pulse survey. Some 38% of respondents see equities accelerating a year from now under the Republican candidate, versus 13% under the Democrat.

“Markets have been extremely active over the past month as traders have juiced up the already ebullient scenario baked into equity valuations, adding improved odds of a Republican sweep to the list of goodies discounted,” said Lisa Shalett at Morgan Stanley Wealth Management.

Callie Cox at Ritholtz Wealth Management says the pre-election jitters still haven’t shown up in the stock market. The S&P 500 hasn’t had a 1% up or down day this month. If that continues to be the case, it will be the first October without a move that big since 2017, she said. It’d also be the first October of an election year without a 1% move since 1968.

“We’re heading into a busy two weeks,” Cox said. “The election conversation will be the loudest, but the packed slate of earnings and economic data could be what markets care about the most. And the results could be noisy, especially from the jobs side.”

A week before Fed gathers to reflect on the appropriate tempo of rates cuts, data is set to show underlying resilience in the US economy and a temporary hiccup in jobs growth. Investors are also awaiting results from firms accounting for nearly 42% of the S&P 500’s market capitalization, including several big techs like as Apple Inc., Microsoft Corp. and Meta Platforms Inc.

The S&P 500 rose 0.3%. The Nasdaq 100 was little changed. The Dow Jones Industrial Average gained 0.6%. The Russell 2000 of small caps climbed 1.6%.

Bonds fell amid weak demand for a pair of US note sales. Treasury 10-year yields advanced three basis points to 4.27%. Oil tumbled as Israel limited Iran strikes to military targets.

“This week’s megacap tech earnings and jobs data will provide plenty of potential fuel for near-term market momentum, but it remains to be seen whether investors will want to sit on their hands until after next week’s election, especially given the volatility around the past two,” said Chris Larkin at E*Trade from Morgan Stanley.

Equities sold off the week before the 2016 and 2020 elections and rallied sharply after them, he noted.

To Saira Malik at Nuveen, it is critical to remain focused on long-term investment goals and attentive to the broader economic backdrop and company fundamentals, as election-driven volatility has historically been short-lived. 

“With that in mind, corporate earnings, inflation and the direction of interest rates should continue to be the structural drivers of financial markets,” she said. “This was evident in the recent backup in US Treasury yields after they bottomed in mid-September following the Fed’s rate cut. Since then, the uptick in yields, paired with underlying fundamentals, may have created another attractive entry point for one of our favored fixed-income sectors.”

Although the polls are extremely tight, and it’s anyone’s race to win, the stock and bond markets have shown recent momentum that appears to favor a result that puts former President Trump back in the White House, according to Anthony Saglimbene at Ameriprise. 

“Government bond yields have risen, the US dollar has strengthened, and areas of the stock market that would benefit from less regulation and lower taxes have ground higher,” he said. “Some of this is related to a strong economy and growing profits, while some of this momentum may be attributed to investors increasingly discounting a Trump victory.”

“In our view, the market can perform well through year-end whether Vice President Harris or former President Trump wins in November,” he said. “We believe fundamental conditions in the US are solid, seasonality factors/historical trends are favorable for stocks, and known election results, which let investors finally move on from the election, could see major equity averages press higher into the end of the year.” 

Investors expect large caps to lead under all election outcomes except a Republican sweep, according to a survey conducted by 22V Research.

“Under a Republican sweep, investors think small caps will lead. Protectionist tariffs, and friendlier tax policies for US earnings, may help explain the dynamic of expectations for higher rates and small cap outperformance under a Republican sweep,” th firm said.

Based on the firm’s client interactions, investors are focused on the implications for tariffs under Trump more so than deficit spending, for which there are safeguards, 22V said. And under a Trump presidency, investors expect 10-year yields to increase. More if there is a Republican sweep. Expectations for those bonds are split between higher and lower under a Harris presidency.

US stocks are broadly leaning toward the playbook seen during the 2016 presidential elections, although the signals are more mixed this time around against a different economic backdrop, according to Morgan Stanley strategists.

The team led by Michael Wilson says that an outperformance in financials and industrials stocks shows market moves are directionally similar to those seen in 2016 to some extent. Materials and small caps — which were relative outperformers around the 2016 election — have modestly trailed since Oct. 1, when the probability of a Trump win began to rise more materially in betting markets, they said.

While so-called “Trump trades” have gained popularity as odds in favor of the former President winning the election rise, Citigroup Inc. says the vote is a close call and some rotation may be seen in the run-up to Nov. 5.

Strategists including David Groman and Beata Manthey said popular Trump trades such as long dollar, short rates, long US vs rest-of-the-world equities have rallied, as consensus leans toward a red sweep — limiting further upside in near term.

Meanwhile, a global strategy betting on a Harris victory is premised on a weaker dollar, lower nominal yields, potential tax hikes, and a general tilt toward climate-friendly policies, implying favoring rest-of-the-world equities vs US, non-US industrials vs energy and health care, as well as emerging-market stocks sensitive to a weaker dollar.

“With a week to go to the election and polls indicating a dead heat, investors are unlikely to take on much new risk, and may even prefer to de-risk until the outcome is known,” said Jason Draho at UBS Global Wealth Management. “Once the dust settles and the outcome is clear, the macro fundamentals should reclaim their spot in the driver’s seat, determining the market direction.”

“Have you heard the one about the markets preferring divided government?” said Brian Levitt at Invesco. “Of course you have. Is it true? Admittedly, the numbers do bear it out although I would argue the analysis isn’t statistically significant. Rather, the returns in most instances tend to be driven by a handful of notable years.”

Levitt looks at two potential 2024 divided-government outcomes: 1) Republican President, Republican Senate, Democratic House (which has resulted in the second-best outcome for stocks) and 2) Democratic President, Republican Senate, Democratic House (this combination hasn’t happened since 1886-1889, leaving it out of the period of the analysis.)

“For what it’s worth, the US stock market posted positive strong returns in recent examples of single-party rule, including under Democrat Bill Clinton (1993-1994), Republican George W. Bush (2005-2006), and Democrat Barack Obama (2009-2010),” he said. “Everyone may ‘know’ that the market does best under a divided government, or everyone might just be confusing correlation with causation.”

Wall Street veteran Ed Yardeni says the approaching US election could augur the return of the market’s bond vigilantes as the Treasury Department readies new debt issuance plans.

It’s a call the founder of Yardeni Research, who famously coined the phrase in the 1980s to describe investors selling bonds to set the US government back on a course of fiscal restraint, has made before. 

“It’s a conceivable scenario that the bond vigilantes are definitely mounting up,” Yardeni told Bloomberg Television on Monday. “There’s no discussion by either candidate about doing anything to reduce the deficit to deal with the debt, to deal with the exploding net interest expense of the government.” 

Corporate Highlights:

Key events this week:

Some of the main moves in markets:

Stocks

Currencies

Cryptocurrencies

Bonds

Commodities

This story was produced with the assistance of Bloomberg Automation.

©2024 Bloomberg L.P.