Stocks, Dollar and Yields Rise on Early Trump Lead: Markets Wrap

(Bloomberg) -- Stocks extended gains, Treasury yields jumped while the dollar hit the highest since July as early returns bolstered trades that have for months risen with Donald Trump’s election prospects.

With polls closed in in more than two-thirds of states, S&P 500 futures were up almost 1%, US 10-year yields rose 12 basis points to a four-month high of 4.39% and Bitcoin rallied 3%, moves that together bore the imprint of trades linked to a Republican victory. While results were still being collected and polls remained open in nine states, the ex-president’s odds of election were climbing on betting markets and on national forecasting sites such as Decision Desk HQ.

Equities in Japan and Australia climbed, while shares in Hong Kong slipped. The Mexican peso dropped 2%, while the Japanese yen slid 1%. 

Trump Media & Technology Group Corp. jumped more than 25% before trimming gains. Tesla Inc. also climbed as the company is in a unique position this election, since it can benefit from a Democrat win given the party’s support for the electric-vehicle industry, and at the same time Elon Musk’s support for Trump means a Republican victory can also be seen as a positive for the automaker. Contracts on the Russell 2000 Index added 1.5%. Smaller companies with typically domestic operations are seen as potential gainers in a Republican win, given the party’s protectionist stance.

The race between Kamala Harris and Donald Trump is shaping up to be the narrowly fought battle that polls forecast, and one that could take days to settle. Trump had taken preliminary leads in Georgia and North Carolina, two key swing states, while vote counting in others was in its early stages.  

“It’s still very early and I expect we could see some wide swings in both directions,” said Keith Lerner at Truist. ‘’That said, on a short-term basis, several of the betting sites show a steep upswing in former President Trump’s odds of winning as early voting results get tabulated. Consequently, we see some of the perceived Trump trades such as small caps, cryptocurrencies, interest rates and even Trump Media having a boost right now. Still, we have a long night to go.”

In contrast to Tuesday’s relatively calm session, Wall Street saw the potential for outsized moves almost regardless of the election’s outcome. Goldman Sachs Group Inc.’s trading desk said a Republican sweep may push the S&P 500 up by 3%, while a decline of the same size is possible should the Democrats win both the presidency and Congress. Moves would be half as much in the event of a divided government. Andrew Tyler at JPMorgan Securities said anything other than a Democratic sweep is likely to cause stocks to rise.

A Morgan Stanley note says risk-taking appetite may dip in the event of a Republican sweep as fiscal concerns fuel yields, but if bond markets take it in their stride the likes of growth-sensitive cyclical stocks would rise. Meanwhile, it sees renewable-energy firms and tariff-exposed consumer stocks rallying under a scenario in which Harris emerges the victor with a divided Congress, while a corresponding fall in yields would benefit housing-sensitive sectors.

Here’s What Wall Street Says:

Dollar strength on the back of Trump odds improving in the early vote count is really hitting the Mexican peso, euro and yen. 

Thin early Asia market liquidity and excitement from early results has amplified market moves of pricing in higher Trump odds.

Liquidity is still fairly thin, so things might have been exacerbated. We’re going to likely see continued wild swings through the night.

While some equity market volatility this week is inevitable, we do not expect the likeliest election outcomes to change our 12-month view on US equities. We expect the S&P 500 to rise to 6,600 by the end of 2025, driven by our expectations of benign US growth, lower interest rates, and the continued structural tailwind from AI. We expect these market drivers to remain in place regardless of who wins the US election. 

Our 10-year yield forecast is 3.5% for June 2025. While we would expect yields to land somewhat higher than 3.5% under a Trump presidency, we would still anticipate positive returns for bonds over the coming twelve months. We do not expect the election result to shift the Fed from a path toward lower interest rates, and inflation remains on a downward trajectory.

We would expect the dollar to be somewhat stronger under Trump than Harris. More pro-growth policies, likely higher interest rates, and tariffs could all provide tailwinds for the dollar. Nonetheless, from today’s levels we would expect dollar depreciation regardless of the victor.

Irrespective of who wins the presidency, strong seasonals favor stocks from now to year-end, especially since a blue sweep is not in the cards. The most likely scenario is a mixed Washington, with leaders on both sides of the aisle needing to compromise to get things done. But a red sweep is still possible, which will help equities via pro-growth policies that likely incorporate aggressive onshoring ambitions, lower corporate taxes and a subdued regulatory landscape. In conclusion, however, bond yields are critical to watch, as investors and traders alike examine the inflationary, deficit and activity impacts of incoming policies.  

The history of stock market performance around elections suggests investors shouldn’t expect much from stocks over the next month.

On average, the index has traded down marginally in the month after the election and only finished higher about half the time. Given the lack of volatility around policy implications from the election this time, and the strong year-to-date gains, we would put the odds of some weakness over the next few weeks as higher. Three and six months out, the story is a bit better, with gains coming about two-thirds of the time with average gains of about 2% per quarter. 

Looking out longer term, the index has generated an average gain of 6.5% one year after elections, though with gains only slightly more likely than losses. Given high stock valuations, the potential for the economy to slow (but land softly), and the possibility of tax increases in 2026, we think double-digit returns in 2025 might be difficult to achieve.

Our historical playbook analysis reminds us that the S&P 500 tends to rise regardless of the balance of power in Washington. The strongest backdrops have tended to be a Democratic Presidency with a split or Republican Congress, and Republicans controlling the White House along with both chambers of Congress. In this context, we are more focused on longer-term opportunities that may open up from big gaps up or down around the event rather than short-term trades.

Regardless of the outcome, we believe the dollar will continue gaining. 

If Trump wins, we expect USD and Treasury yields to rise as fiscal and trade policies under a Trump presidency would be inflationary. This could force the Fed to keep the policy rate restrictive for longer. However, Trump’s ambiguous currency policy is a USD headwind. If Harris wins, we expect USD and Treasury yields to have a kneejerk drop before staging a recovery that’s underpinned by the strong U.S. economy.  Fiscal and trade policies under a Harris presidency are less likely to complicate the Fed’s price stability mandate and this has neutral implications for USD and Treasury yields.

We also may not know the makeup of Congress immediately  Democrats have greater odds of winning a majority in the House of Representatives and Republicans are favored to win the Senate.  As such, a divided Congress is the most likely scenario in our view. The political gridlock will make it hard for the next president to implement major fiscal changes.

Market will be fine with whoever wins, but it won’t be fine if we don’t have a winner announced this week.

Trump’s core policies on taxes, tariffs, and immigration are considered inflationary. This is why we have seen a big rise in Treasury yields and the US dollar until the start of this week.

The greenback could give back more gains, should Harris win.

Conversely, a Trump victory could spell trouble for the yuan, euro, Canadian dollar and Mexican peso, among other currencies. The threat of universal tariffs could hit other risk assets too.

Investors should look past the election and focus on the fundamentals of what drives markets. The economy and earnings continue to be better than expected, most stocks are reasonably priced and the Fed is in an accommodative mode and is expected to cut interest rates again this week. There is an excellent backdrop for stocks right now.

Our message to investors is to buy the chop and weakness that is being driven by election uncertainty and to remain fully invested as the market melts up in a Santa Claus rally, which we believe will last through year-end, pushing the S&P 500 to 6,150.

We see opportunities in tech, telecom, financials, industrials, utilities and energy.

We expect the Fed to lower rates by 25 basis points on Thursday, citing mixed economic data, and some weakening in the labor market. An accommodative Fed, slowing inflation and strong earnings is a classic “Goldilocks” economy and a great setup for stocks.

The election is finally here and emotions are running high. Elections matter, but let’s not forget that an economy that continues to surprise to the upside, record earnings, and a dovish Fed likely matters more for this bull market than who is in the White House.

Things are close, we know that. But we also know this year will be the thirteenth year in a row that saw the S&P 500 close higher amid a split Congress. Gridlock can be a good thing and should we see this once again, this could be what investors should be rooting for.

The outcome of the presidential and congressional elections will determine government policy across four key areas that influence the economy and equity markets: taxes, regulation, trade and fiscal spending.

We view a Trump win, likely coming in a sweep scenario, as net positive for equities as it preserves favorable corporate tax treatment and builds on tax elements that expired. A Harris win, likely coming with a divided Congress, would be mildly negative due to fewer provisions of expiring tax legislation getting extended due to political gridlock.

While investors may react to every sound bite from the presidential candidates, creating elevated volatility through election day, the trajectory of the economy is the most important driver for equity markets over the long term. With the Fed cutting rates, that trajectory should accelerate from here.

First off, we would simply tell investors not to overreact.

We believe we are set for a strong end-of-year rally for many reasons, two of which are a possible chase scenario by the bears who finally have to capitulate, and performance anxiety from large money managers who may have missed the big moves in certain names. 

We do believe the market prefers Trump for lower taxes and less regulation, and with Kamala, we likely see higher taxes and more regulation, but again with the balance of power, we may not see many of their proposed policies go into effect.

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.

--With assistance from Vildana Hajric, Richard Henderson, Shikhar Balwani, Carter Johnson and Sydney Maki.

©2024 Bloomberg L.P.