Elections in Mexico, India and Europe have set off upheavals in global stock markets this year. In the US, investors contending with uncertainty related to inflation, interest rates and geopolitics are already bracing for volatility that could accompany the presidential campaign and November election.
But while markets tend to hate uncertainty, and volatility can raise risks, history and other factors suggest that it’s by no means certain that even a nail-bitingly close contest will be bad for equities. The two candidates — President Joe Biden and presumptive Republican nominee Donald Trump — will face off in this cycle’s first presidential debate on Thursday, June 27.
What data about election years shows
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 dotcom 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 was delayed for 36 days; the other was 2008.
That said, there’s such a thing as too much uncertainty
Market pundits have already started to warn that this election may remain too close to call until the very last minute, and there are chances — albeit small — that a decision may not be clear days after the election. They point to the possibility of a contested or close election result as well as the ongoing adoption of vote by mail, where counting takes longer than machine votes.
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. Markets are expected to struggle 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 the Wall Street’s “fear index,” shows that this year traders have already started to prepare for the risk of stock-market swings around the November vote, a stance that is usually seen a little later in the year. The reason could be that this election cycle, voters have had some clarity about the main candidates earlier than in typical election years.
Meanwhile, Goldman Sachs has advised that clients who believe an election winner won’t be decided for more than 15 days, should consider owning November VIX contracts, which represent implied volatility through mid-December.
That said, strategists at Bank of America have noted that an index gauging policy uncertainty and the VIX itself are at lows, suggesting the market is yet to fully price in a potential rise in political uncertainty into the election.
Issues for investors to zero in on
Tax, trade and immigration are key issues that investors will be watching closely.
Trump has promised to lower the corporate tax rate to 20% from the current rate of 21%, according to people familiar with remarks he’s made. He has also vowed to make permanent the Republicans’ sweeping 2017 tax law and urged renewal of key portions of the bill. Meanwhile, reports suggest Democrats are working on plans that will raise taxes on corporations and the rich.
Trade and tariffs have already been in the headlines. Trump has talked about a 10% across-the-board tariff, and steeper levies on Chinese-made goods. Biden has unveiled sweeping tariff hikes on a range of Chinese imports, including semiconductors, batteries, solar cells, critical minerals, steel, aluminum and electric vehicles.
Trump has said he will simply deport undocumented immigrants, meanwhile Biden has shuttered the US-Mexico border to some asylum claims until the level of crossings there fall substantially. J.P. Morgan has said that any effective efforts to restrict immigration could be a potential driver of inflation if it creates significant labor shortfalls, thereby curbing growth.
Equity sectors a Biden win would hit or help
Biden’s positive stance on clean energy would mean that his reelection would be good news for that entire group, including EV-makers, as well as EV charging network operators such as ChargePoint Holdings Inc., Beam Global, Blink Charging Co., as well as suppliers and battery makers.
Solar stocks are expected to do better under Biden as well, including First Solar Inc., Sunrun Inc., Enphase Energy Inc. among others.
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.
Financials may face continued risk given the Biden administration is expected to stay tight on regulations, with higher capital requirements for banks like 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 the current administration’s Inflation Reduction Act has pushed for reduction in drug prices.
Equity sectors a Trump win would hit or help
Companies with high revenue exposure to China can face disruption if trade tensions escalate with a Trump win. Some prominent names include chipmakers such as Nvidia Corp., Broadcom Inc, Qualcomm Inc., materials companies such as Air Products and Chemicals Inc. and Celanese Corp., autos such as Tesla Inc. and BorgWarner Inc., industrials like Otis Worldwide Corp.
Clean energy and the electric vehicle complex that have benefitted and will continue to get a boost from Biden’s Inflation Reduction Act are expected to face challenges given Trump’s has said he will entirely reverse Biden’s EV policy. If Trump rolled back tax credits extended to buyers, companies at risk will include Tesla Inc., Rivian Automotive Inc. and Lucid Group Inc., as well as battery makers and parts suppliers.
Oil, natural gas and traditional energy companies will likely benefit from the pro-oil policies in 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., Chevron Corp., among others.
Defense stocks are expected to do better under a Republican win, 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.
Cryptocurrency stocks can also benefit under Trump as the former president has increasingly highlighted Bitcoin and other digital assets on the campaign trail in recent weeks as a way to reach new voters. Stocks to watch include Coinbase Global Inc., Marathon Digital Holdings Inc., Riot Platforms Inc., Cleanspark Inc., MicroStrategy Inc. and Cipher Mining Inc.
This article was provided by Bloomberg News.