As Americans decide their 47th President a week today, we take a look at historic moves in stock indices and which equity sectors may move, depending on who wins the keys to the Oval Office. Based on opinion polls, the race remains extremely tight and neck-to-neck in key swing states, with poll numbers well within the margin of error. That means multiple combinations of presidential and congressional outcomes are very much in play.
But there have been big moves in prediction markets, which we have written about already here. These have shifted meaningfully toward the Republicans and a Red sweep in the contests for both the presidency and control of Congress. Financial markets have also moved a lot, with stocks exposed to a Republican win outcome rising, while those seen linked to a Harris presidency have fallen.
Stocks indices performance during election periods
On a wider level, US stock markets tend to underperform slightly during election years, though not to the point where portfolios need to be reallocated. Since 1928, in the year leading up to an election, stocks have gained less than six per cent, while the S&P500 ended positive in 17 out of the last 23 elections, with an average return of just over seven per cent. This is modestly lower than the average annual return. Interestingly, when an incumbent is re-elected or if a party retains control of the White House, equity returns are slightly higher than when a new party comes to power.
Typically, elections do breed uncertainty, and history shows this can cause some seasonality in volatility. Markets tend to be more volatile in the lead-up to the election, but after election day, that source of uncertainty is cleared, and, regardless of the result, markets move on and refocus on the fundamentals. In fact, median returns in the first three quarters of an election year were 1.9% compared to 3.1% in the fourth quarter going back to 1936, according to investment bank, JP Morgan.
One other factor to note is whether we get a blue or red sweep, or a divided government. The returns of the benchmark S&P 500 since 1928 show that a Democratic or Republican-controlled administration has averaged returns close to 9%, while a divided government returns are close to 6.5%. A divided government is when no one party controls the House of Representatives, the Seante and the White House at the same time.
Different agendas, some things the same
The two candidate’s policy mix differs significantly and while a split Congress would limit either President’s ability to implement their agendas, a clean sweep will pave the way for more dramatic policy changes. A key point of difference for example is in trade policy. Although this has major bipartisan agreement (“tough on China”), the two sides differ markedly in their approaches.
Another area which could change is the stance of the Fed, who will remain data dependent and continue with their gradual pace of rate cuts. The election outcome will likely only have a minor bearing, which should be supportive for equities. A caveat to this is the bond market reaction and any adverse response to the ever-growing US debt pile.
Fiscal policy will remain expansionary under both candidates, although Harris’ policies argue for higher public investment, higher corporate taxes and increased regulation. A Trump presidency will likely see lower taxes, or at least diminished prospects of higher taxes, but with potential concerns over debt sustainability. That is because it is estimated a Trump presidency would add $7.5tn to already yawning $22tn cumulative deficits over the next decade (Harris: +$3.5tn).
Trump second term
It is presumed President Trump would adopt an equity-market friendly outlook. A pro-growth mix of tax cuts and deregulation would help financials and energy both because they are good gauges of economic growth and also the uncertainty of Democratic regulatory changes would be eliminated. Defence companies may also enjoy a more supportive backdrop in Trump 2.0 amid more defence spending. The tech giants are already facing regulatory and antitrust scrutiny from both Democrats and Republicans, so any victory may not significantly change the landscape.
Harris victory
A Harris White House would bring tougher regulations on industries like coal and fossil fuels, as well as on financials. Notably, these sectors have a high combined index weight in the S&P500. Well-known planks of Harris’ policies are green energy and infrastructure spending. This may benefit EV-makers like beaten-up Rivian, not least due to EV tax credits. Other names like NextEra could gain, as the world’s biggest producer of clean, renewable energy. Utility stocks have done well this year as investors bet that the demand for power generation will continue to rise in the years ahead.
Investor perception and policy priority will affect how stocks perform both before and after the election. What is possible is higher volatility as this story plays out in the weeks ahead. Any change in control in the White House is often associated with higher equity market volatility. We must also contend with the prospect that the determination of the outcome may take much longer this time. On the other hand, will equities struggle initially if Harris becomes President, due to the already strong front-running of a presumed Trump win? Nevertheless, stocks should eventually recover if Democrats prioritise economic recovery.