As the U.S. elections are approaching, investors are seeking clear answers on how potential outcomes could impact the markets. Whether it’s fiscal policy, trade or impacts on certain sectors, the platform of each candidate can shape the financial landscape for years to come. Charu Chanana, the Head of Currency Strategy at Saxo Bank, addresses some of the most critical questions posed by investors preparing their portfolios for this event.
Who is the favorite in the race for the presidency in 2024?
In relation to the upcoming elections, both betting markets and polls provide valuable information about which candidate currently has the upper hand.
- Betting on Polymarket: Betting platforms, such as Polymarket, allow users to bet on election outcomes for real money, providing a current picture of market sentiments. The odds on these platforms often fluctuate depending on the course of the campaign, debates, or recent news. Although betting markets do not always coincide with poll results, they can indicate where investors perceive a momentum shift.
- Poll tracking: Polls remain a key tool in assessing voter sentiment. To get an accurate picture, it’s useful to use aggregators such as FiveThirtyEight and RealClearPolitics, which collect and average the results of various polls. This approach helps to smooth out biases and the poll’s partialities. It is important to pay attention to swing states and notable demographic groups, as they often determine the U.S. election outcomes. Changes in polls following significant events can indicate which candidate is gaining or losing support.
Combining data from betting markets and polls, a broader picture of the election favorites can be obtained, helping investors predict potential election outcomes.
What are the key differences in Trump and Harris’s policies?
Each candidate presents a different political strategy, which could have varying impacts on sectors and asset classes. Below we outline their potential economic and financial programs.
- Trump: In his case, it is anticipated there will be an increase in public spending combined with tax cuts, an expansion of tariffs, and a pursuit for energy independence. Such actions could support defense and energy sectors but could also worsen international relations.
- Harris: Her program may focus on increasing government spending, but combined with tax increases, cooperation in overseas trade, and a strong emphasis on renewable energy. This approach could encourage sustainable development investments and reduce commodity price pressure.
What are the most positive and negative post-election scenarios?
The most positive market scenario is perceived to be a Harris win with simultaneous loss of a Senate majority by the Democrats. This situation would maintain the current political balance and avoid corporate tax hikes and new tariffs, promoting continued market growth.
Conversely, the most negative scenario assumes full Democratic dominance, which would likely lead to corporate tax increases (from 21% to 28%), potentially resulting in rapid company valuation drops and a potential U.S. stock selloff. Nevertheless, the likelihood of this scenario is low due to the Electoral College system in the U.S., which favors the Republicans.
How will the elections impact market volatility?
U.S. elections are historically associated with increased market volatility. This year is no different, as investors analyze the consequences of potential leadership change or the continuation of current policy. Volatility often stems from uncertainty, with key areas such as fiscal spending, trade policy, and international relations at the center of the debate.
In light of potential short-term fluctuations, it may be worthwhile to diversify a portfolio based on various asset classes. Consideration of adding safe assets, such as gold or cash equivalents, could constitute effective hedging. Options also prove useful as tools to manage portfolio volatility in challenging times. They offer flexibility and defined risk and profit profiles, making them suitable opportunities for various market scenarios. For instance, options can be used to protect a portfolio from sharp downturns or generate income in a stable price market.
What was the situation in markets during election years?
The relationship between presidential elections and stock markets is complex. Markets are typically expected to perform well in the lead-up to elections, as the incumbent president strives to boost the economy to appear favourable.
In the analysis “How U.S. elections shaped market outcomes”, we examined the U.S. stock market outcomes during the last 13 elections, since 1972. It emerged there is no significant difference in cumulative returns between election years and others. Considering financial market efficacy, this aligns with expectations.
A case can be made arguing that a strong stock market before elections favors the party controlling the White House. Another conclusion is that the annual return rate from the S&P 500 index after elections is usually significantly higher when the Democratic Party wins, although conducive circumstances played a part, since Democrats prevailed before years of economic recovery – 1976, 1996 and 2020.
How have markets historically behaved after U.S. elections?
Typically, in the weeks following U.S. presidential elections, markets experience heightened volatility as investors adjust to the outcomes. However, in the longer term, markets usually stabilize and record growth regardless of which party wins, with economic conditions, not merely political change, being the main driving factor.
Post-election trends:
- A clear victory for one candidate mitigates uncertainty, leading to market stabilization and a refocus on fundamental investment factors.
- An impasse can heighten policy uncertainty, potentially leading to volatility. Extended vote counting and contested election results, like in 2020, would also likely increase volatility, especially if a constitutional crisis arose.
Short-term volatility is expected, but the long-term trend is usually growth from the moment the market digests the election results. Portfolio diversification can help weather this volatility.
Which sectors will benefit most from the individual candidates’ victory?
Outcomes for individual sectors will significantly vary depending on the election winner. Here’s a brief review of potential winners:
If Trump wins:
- Defense: A probable increase in spending on military and defense contracts.
- Energy: A focus on fossil fuels and energy independence continues.
- Technology: Tax cuts could benefit the technology sector, although trade wars could present a challenge.
If Harris wins:
- Renewable Energy: A focus on sustainable development could boost investment in clean energy.
- Healthcare: Potential reforms in the healthcare sector could transform it while introducing new opportunities for innovation.
- International Trade: Lowering tariffs and pushing for collaboration could benefit global exporters.
Which stocks should be watched before the U.S. elections?
The most significant market influence could stem from a complete party victory, allowing for ambitious plans to be rolled out. Here are the key stocks to watch depending on the election results:
A full Republican victory:
- Lower corporate taxes and relaxed antitrust regulations could favor Wall Street, major tech companies, and banks.
- Defense company stocks, such as Lockheed Martin (LMT) and Rheinmetall (RHMG), could benefit from increased military expenditure.
- Energy-related stocks, like ExxonMobil (XOM) and Chevron (CVX), could fare well due to the continuation of policies promoting traditional energy sources.
- Infrastructure companies, such as Caterpillar (CAT), could gain from increased public spending.
- Banks like JP Morgan (JPM) and Goldman Sachs could profit from potential mergers and acquisitions growth.
- Small-cap companies could benefit from Trump’s proposed corporate tax cuts.
A full Democratic win:
- Increased spending on eco-friendly technologies and aid for low-income individuals could drive growth in the renewable energy and infrastructure sectors.
- Renewable energy companies like NextEra Energy (NEE) and First Solar (FSLR) could gain from increased emphasis on clean energy.
- Tech giants like Apple (AAPL) and Microsoft (MSFT) could benefit from reduced geopolitical tensions and global trade stability.
How will the elections affect the U.S. dollar?
Currency markets and interest rates could fluctuate due to the elections. Markets usually factor in political outcomes ahead of time, but an unexpected result can trigger rapid movements.
Trump’s growth-oriented policy, which continues fiscal stimuli, could cause inflation and boost the U.S. dollar’s value in the short term. Heightened trade wars could also strengthen the dollar while concurrently weakening currencies such as the Chinese yuan and other Asian currencies.
Harris’s policy is not as precisely defined, but it may signal relief for currencies exposed to tariffs, leading to a weaker U.S. dollar. More stable international relations could lead to short-term U.S. dollar weakening but provide more stability in the long run.
How to invest regardless of the election results?
There are certain investment rules, such as diversification and long-term perspective, which remain key in managing market uncertainty. Several trends are expected to continue or accelerate, offering attractive areas for investing:
- Infrastructure spending: Investment in infrastructure is expected to grow, benefiting sectors like construction, building materials, and industry.
- Inflation risk: The budget deficit could exceed 6%, potentially causing inflationary pressure. Consider investing in commodities, TIPS (inflation-protected bonds), and REITs (investing in property), which can protect from inflation.
- Deglobalization: As global supply chains shift, countries like Vietnam, India, and Indonesia could benefit from ongoing deglobalization.
- AI and technological innovation: AI development, cyber security, and electrification will remain key growth areas.
- Defense spending: Due to geopolitical instability, defense budgets are likely to increase under both candidates, offering potential in defense company stocks.
- Clean energy: As net-zero-emission targets and low interest rates are implemented, investments in clean energy may increase in prominence.
- Healthcare: Perceived as an innovative and defensive sector, it may continue to thrive, like technology in previous cycles.
- Gold: Considered a safe haven during times of uncertainty.
Source: https://managerplus.pl/jak-wybory-w-usa-wplyna-na-rynki-prognozy-i-scenariusze-dla-inwestorow-w-2024-r-81841
