Five Keys for Investors Ahead of US Election Day | Financial markets

Investors are always nervously awaiting the holding of the US presidential elections and spend the following days with a certain shock in their bodies. The November 5 election event has an undeniable planetary political dimension, and is also a market event of the first magnitude, although, as a rule, with very short-term effects and not changing the course of the market at that moment. George W. Bush suffered from the bursting of the dot-com bubble in his first term, and Barack Obama began his first term under the devastating bankruptcy of Lehman Brothers. In this case, the S&P has been trading relentlessly in the upper zone without showing any signs of fatigue, and Wall Street is expecting a Trump victory in these final sessions. A result that in principle would be well received by the stock market, especially if there was no Republican victory, although this is not true for bonds. In any case, as past elections have shown, polls and bets can lead to nothing. The only thing that is certain for the next few days is that tensions will be high.

Unpredictable result

The November 5 election in the United States will be the closest in years. The most controversial in the last 50, according to Citi. Trump comes in with a slim lead, and a Republican victory with that party controlling the House of Representatives in addition to the White House is one of the scenarios that has the most options. Another, almost as likely, is a Kamala Harris victory in a divided Congress, in which Republicans would gain control of the Senate and therefore the ability to block House legislation.

Francois Rimet, senior strategist at Crédit Mutuel AM, prefers not to subscribe to the most common thesis among investors about a Republican presidency. “

It seems too early to be sure. The difference between the two candidates in swing states remains very small. “Every state seems to favor Donald Trump, but within a margin of error of just a few percentage points,” he explains. And remember that past elections don’t inspire much confidence in the polls. So, in 2020, Joe Biden led nationally by 12 points (55% versus 43%) and ended up with a difference of only 4 points. In 2016, Hillary Clinton’s lead was 4–5 points, and although she ultimately won the popular vote by just 2 points, she lost the election.

The result will be determined in several states, and it is likely that it will not be finalized on November 5th. Such uncertainty will lead to increased volatility in the market. “The worst-case scenario for markets would be a result so close that it could be challenged, causing potential problems,” said Yves Bonzon, investment director at Julius Baer.

Lessons for those who try to foresee

Faced with the apparent consensus that Trump will win, Crédit Mutuel is citing that some market indicators are also rising and that would bring a victory for Harris. One of them is the S&P 500 index, which recorded a 5% gain between July and October. “Since 1980, when the S&P rises from the end of July to the end of October, the outgoing party wins,” says Rimeu. The other is the so-called poverty index, which is calculated by combining the unemployment rate and the inflation rate and has fallen under Joe Biden’s leadership. Since 1980, whenever the index declines, the outgoing party wins. That is, a democrat.

But Pimco insists that the performance of bonds and stocks in the month before the election is not a good indicator of what will happen next. In 50% of cases observed between 1992 and 2020, markets retreated. However, market reaction a day or even a week after the election was a slightly more reliable indicator of profits realized a year later. “Bond yields tended to retreat from the one-day reaction about 60% of the time, and equity returns had a similar sign over the weekly and annual horizons about 75% of the time,” explains Libby. Cantrill, head of public policy at Pimco.

Stock market rising with Trump?

Statistics aside, the market consensus seems to be leaning towards a stock market rally if Trump wins, arguing that his corporate tax cut from 21% to 15% (for companies manufacturing in the US and 20% for other countries). ) will be a boost to the stock. The financial scissors that brought Trump to power in 2017 did send the stock market higher, with the S&P ending the period up nearly 60%. But this time, those bullish expectations for a Republican presidency have a troubling downside: the impact of tariffs. Trump is also proposing to raise tariffs by more than 10% on all imports, up from the current average of 3% and by at least 60% on Chinese products.

In principle, such protectionism could boost earnings for U.S. companies, especially companies with a more domestic business profile, as is often the case with small- and mid-cap companies. But it would also have an inflationary effect, which could push back the Fed’s rate cuts and thus intensify the selling of risky assets such as stocks. This is precisely the warning that Wall Street giants such as Bank of America and Citi send to their clients. These companies advise selling shares if Wall Street reacts to a rally to Trump’s victory. Especially if Republicans win not only the White House but also control of both houses, making it easier to implement Donald Trump’s most extreme proposals on tariffs and immigration controls.

If Trump wins, the US stock market may respond to growth, but not the European stock market, which is very vulnerable to Republican tariff policies and whose two large economies, Germany and France, are in recession. The European stock market has a much more export-oriented profile and is also exposed to the risk of Chinese weakness, which could be affected by a Republican presidency. In any case, the question remains to what extent both candidates will be able to fulfill their election promises. “The effectiveness of these policies will also depend on the composition of Congress and the decisions of the courts if the president’s policies become the subject of litigation,” Pimko notes.

Nervous about US sovereign debt

Yields on 10-year US bonds, the global benchmark for measuring credit risk, have risen to July highs these days, while the US sovereign debt volatility index is marking its highest levels in a year. “In the case of a clear result, a Trump victory is considered positive for stocks and dangerous for US Treasuries, while in the case of a Kamala Harris victory, the opposite is true,” notes Yves Bonzon.

US bond yields are rising on anticipation of a Trump victory and the threat that Republican inflation policies will impact the Fed’s rate-cut roadmap. The Federal Reserve meets this Wednesday, just a day after the election, and while another 25 basis point rate cut is expected, it is also likely to send a signal of calm about further cuts. “It is likely that Powell’s message will reflect the view that the economy is somewhat stronger than expected. Therefore, one can foresee that while maintaining confidence in the process of normalizing inflation, Powell will emphasize the convenience of remaining cautious and not cutting rates too quickly. Recent resistance to lower core inflation with monthly rate hikes underscores this caution,” they note at Macroyield.

Invest for the long term

The meeting with the Fed will bring investors back to the reality of economic performance, regardless of the immediate effect of US policy. And we shouldn’t forget that recent market movements, which could in principle be linked to Trump’s improving polling position, also coincide with other important developments, such as the easing of US recession fears following stronger national data, rising expectations for further fiscal stimulus in China and events in the Middle East. Deutsche Bank remembers that in the past, stock markets have been little influenced over the medium term by who moves into the White House, confirming the old stock market wisdom that politics has little influence in stock markets. “While significant tactical bets can be made to create a series of strategy plays, investment portfolios should be built to last longer than the election cycle,” they conclude.