(Bloomberg) -- One of the most crucial events of the year — the US presidential election on Nov. 5 — is days away. For Wall Street, the race between Vice President Kamala Harris, the Democratic candidate, and Republican former President and nominee Donald Trump adds a layer of volatility at a time when uncertainty about interest rates, the labor market and conflicts in Europe and the Middle East are already testing investor nerves.
While polls have the two candidates neck-and-neck, so far the uncertainty isn’t bothering investors. The S&P 500 Index has inched ever higher this year, notching 47 record highs in 2024 — and stocks may get another boost after the election, as has historically been the case.
An election that’s effectively a coin flip makes it difficult for traders to wager on what’s about to happen, which is perhaps why there’s been so much interest on betting sites such as PolyMarket and PredictIt, where Trump is favored. Similarly, indexes from Goldman Sachs Group Inc. that track trading strategies for each party’s potential victory show the basket that follows Republicans advancing starting in late September, with the one following Democrats declining.
What data about election years show
Election years have generally been good for the US stock market. The S&P 500 Index has risen in almost every election year since 1960. The exceptions were 2000 and 2008, which were marred by the dot-com bust and the great financial crisis, respectively. The record looks even better for recent election cycles. In the three election years since 2008 — 2012, 2016, 2020 — the benchmark index rose at least 10%.
Taking a narrower view and focusing on just the last seven months of an election year gives a similar picture. Since 1950, the S&P 500 has risen in that time frame for 16 out of the 18 presidential elections, according to data and analysis from the Stock Trader’s Almanac. One down year was 2000, when the outcome wasn’t known for 36 days; the other was 2008.
As for the effects on bonds and the value of the dollar, there haven’t been any apparent patterns during election years. For example, the US Dollar Index, known as DXY, which measures the greenback against major currencies, rose three times during the past six election years, and fell another three.
The risk of a close or contested election
There’s a reasonable chance that an outcome may not be clear until well after Election Day. Experts point to the possibility of a contested or close election result, which may raise volatility across asset classes and even derail the stock market’s torrid run.
During the 2000 Florida election recount battle, the S&P 500 lost more than 4%, yields on 10-year Treasury notes fell 52 basis points and gold prices jumped as investors piled into haven assets.
The possibility that the election may end in a protracted dispute or worse, political violence, is one that investors are grappling with as well. Stocks are expected to decline if such a situation arises, especially if it also means uncertainty for the final result.
What the ‘fear index’ is saying
Any major event that can affect the economy and disrupt markets can lead to trading volatility. Elections are no exception. The futures curve of the Chicago Board Options Exchange Volatility Index (VIX), also referred to as Wall Street’s “fear index,” historically tends to rise until close to Election Day, then recede after the vote.
Options positioning data suggest traders are pricing in a one-day move of 1.8% in either direction for the S&P 500 on Nov. 6, the day after the elections, according to strategists at Barclays.
Like stocks, bonds also typically price in higher volatility ahead of the election and then calm down afterward. The MOVE Index, the bond market’s version of the VIX, rose an average 4 points in October during election years since 1988 and fell by 7 points in November. The option market suggests that investors expect Treasuries to move about 18 basis points immediately after the election, according to Harley Bassman, managing partner at Simplify Asset Management.
Key issues for investors
Taxes: Trump has said he will lower the corporate tax rate to 15% from the current rate of 21%, vowed to make permanent the Republicans’ sweeping 2017 tax law and urged renewal of key portions of the bill. Meanwhile, Harris is pushing for an increase in the corporate tax rate to 28%. Her plan proposes keeping the current tax rate in place for those making less than $400,000, while raising rates for higher earners.
Trade and tariffs: Trump has talked about a 10% to 20% across-the-board tariff, and even steeper levies on Chinese-made goods. Even though Democratic President Joe Biden unveiled sweeping tariff hikes on a range of Chinese imports earlier this year, Harris’ campaign messaging suggests that, while she won’t go easy on China, she sees no upside in a greater rupture between the world’s two biggest economies. Goldman Sachs economists have said that, if Trump wins, his likely tariff hikes would lead to an inflationary bump.
Immigration: Trump has said he will deport undocumented immigrants. Harris has shown support for an immigration deal that includes the construction of additional barriers along the US souther border; in the meantime, Democrats have foreclosed asylum claims for some migrants entering the US from Mexico. JPMorgan Chase & Co. strategists have said that any effective efforts to restrict immigration could be a potential driver of inflation if it creates significant labor shortfalls.
Assets to watch if Harris wins
Stocks: A Harris victory is expected to benefit a swath of companies such as renewable energy producers, electric-vehicle makers and even utilities. The bigger Harris trade, however, is the bet that she can avoid the trade war with China that Trump’s more extreme rhetoric about tariffs threatens.
Democrats’ positive stance on clean energy means a Harris win would be good news for companies in the industry, including electric-vehicle makers (such as Tesla Inc., Rivian Automotive Inc. and Lucid Group Inc.), EV-charging network operators (ChargePoint Holdings Inc., Beam Global, Blink Charging Co.), and battery makers. Stocks of solar companies — such as First Solar Inc., Sunrun Inc. and Enphase Energy Inc. — are expected to do better under Harris as well.
Homebuilders could get a lift, as Harris has proposed as much as $25,000 in down-payment support for first-time homebuyers, and suggested a tax incentive for builders who work on starter homes. Watch stocks such as DR Horton Inc., Lennar Corp. and KB Home.
Cannabis stocks also typically do well under Democrats, and names to watch include Tilray Brands Inc., Canopy Growth Corp., Curaleaf Holdings Inc., as well as the AdvisorShares Pure US Cannabis ETF.
The financial sector may not fare as well, given that a Harris administration is expected to stay tight on regulations, with higher capital requirements for banks such as Bank of America Corp., JPMorgan Chase & Co. and Goldman Sachs Group Inc., and continued pressure on credit-card fee income. Drugmakers may also face regulatory pressure, as Harris has proposed a $2,000 annual cap on out-of-pocket costs for prescription drugs.
Bonds: Neither candidate shows the willingness to rein in US debt, which would put pressure on longer-term bonds over time. But between the two candidates, Harris is seen as less hostile to the bond market, according to a survey of Bloomberg Terminal subscribers in September.
Currencies: Under a Harris administration, less uncertainty around US policymaking — from trade and immigration to foreign policy — could weigh on the dollar, a traditional safe-haven currency, according to Wells Fargo strategist Aroop Chatterjee. A Democratic sweep of the White House and Congress would lead to higher social spending — funded by tax increases — a scenario that would also weaken the dollar, analysts at Convera say.
Assets to watch if Trump wins
Stocks: Companies with high revenue exposure to China could face disruption if trade tensions escalate. Some prominent names include chipmakers like Nvidia Corp., Broadcom Inc. and Qualcomm Inc.; materials companies like Air Products and Chemicals Inc. and Celanese Corp.; and industrials firms like Otis Worldwide Corp.
Oil, natural gas and traditional energy companies are seen as likely beneficiaries of a Trump win, given his vow to roll back restrictions on domestic oil production. Stocks to watch include Baker Hughes Co., Exxon Mobil Corp., ConocoPhillips, Occidental Petroleum Corp. and Williams Cos Inc. Halliburton Co., Devon Energy Corp. and Chevron Corp.
The same clean energy and EV companies that have benefited from Biden’s Inflation Reduction Act are expected to face challenges under Trump, given he’s said he will entirely reverse Biden’s EV policy. If Trump rolled back tax credits extended to buyers, companies at risk include Tesla, Rivian and Lucid, as well as battery makers and parts suppliers.
Defense stocks are expected to do better under a Republican president, given expectations that defense spending will be a clear priority for the party. Stocks to watch include Lockheed Martin Corp., Northrop Grumman Corp., and RTX Corp. Similarly, prison stocks like GEO Group Inc. and CoreCivic Inc. could gain, as tough immigration policies would benefit operators of correctional facilities. Gunmakers’ stocks, such as Smith & Wesson Brands Inc. and Sturm Ruger & Co. Inc., also tend to climb on Republican wins.
Cryptocurrency stocks have been seen as a proxy “Trump trade” of late, as the former president has made an about-face on Bitcoin and other digital assets since his time in office, even pledging to make America the “crypto capital” of the world. Stocks to watch include Coinbase Global Inc., Marathon Digital Holdings Inc., Riot Platforms Inc., Cleanspark Inc., MicroStrategy Inc. and Cipher Mining Inc., as well as the Bitwise Crypto Industry Innovators ETF.
If Trump and his running mate, Senator JD Vance, win, shares of two media companies may climb. They are the parents of the Truth Social platform, Trump Media & Technology Group Corp., in which the former President owns a majority stake, and that of Rumble Inc., a video sharing platform in which Vance’s venture capital firm Narya owned shares as of May.
Bonds: In the bond market, a wager that long-term bonds would underperform short-term debt – known as curve steepener — became popular after Biden’s poor debate performance in late June appeared to clear Trump’s path to retake the White House, and has remained an attractive bet since. The bet – dubbed the “Trump trade” by bond investors — could get additional ammo from the Federal Reserve’s interest-rate cuts. Policymakers lowered interest rates by 50 basis points in September.
Currencies: Wall Street strategists widely agree that Trump’s tariffs would, at least in the short term, support the dollar and hurt currencies such as the Chinese yuan and Mexican peso. But Trump has also argued that the world’s reserve currency is too strong. How he balances those competing ideas remain to be seen.
--With assistance from Carter Johnson.
©2024 Bloomberg L.P.