It’s finally here. Not the election itself, but the clearest opportunity yet to bet on election winners and losers.
Investors have been eyeing the election all year, since the outcome has major implications for tax policy, trade, immigration, and many companies that could benefit or suffer from forthcoming changes. But many factors affect the value of stocks and other assets, including economic developments and the Federal Reserve’s monetary policy. Inflation and jobs data, plus the Fed’s interest rate cuts, have largely been driving markets for most of 2024.
Those factors are now fading into the background, at least until Election Day on Nov. 5. The latest reports on jobs and inflation show, reassuringly, that the economy remains strong as inflation fades. There won’t be any interest rate news out of the Fed until after the election, so Wall Street is looking for different market-moving triggers.
Their names are Kamala Harris and Donald Trump. In an Oct. 11 report, analysts at Citi explained “how to trade the US election,” based not just on who wins the White House but on which party controls each chamber of Congress. “With September [jobs] out of the way, Election Day quickly approaching, and polls being quite close, elections should now become a much larger, more consistent driver of markets,” the Citi analysts explained.
Ordinary investors might want to sit this one out. There are countless permutations of stock, bond, commodity, and currency price fluctuations that could occur as markets price in a Harris or Trump victory. “It’s all about getting through the event and having a clear winner on Nov. 6,” said Jeff Hirsch, editor in chief of the Stock Trader’s Almanac. “Specific stocks and sectors vis a vis the two candidates are less important, from my perspective.”
That won’t stop active traders from speculating on the election outcome, and the action could temporarily affect the direction of 401(k) plans and other routine investments. The stock market typically rises during an election year, as it has in 2024, with the S&P 500 up 22% so far. But October can be shaky. Volatility jumps and stocks tend to wobble. So far this month, volatility has tipped upward, on cue, with stocks up a tad.
Election bets are based on four basic scenarios: Harris or Trump winning with their party gaining full control of Congress, or Harris or Trump winning while Congress remains split between Democrats and Republicans. That will determine if the next president governs with a friendly Congress able to pass partisan legislation or with a divided Congress unable to pass the president’s favorite bills.
While the odds of Harris or Trump winning are roughly 50-50, there's a good chance the next president will have a divided Congress. Investing firm Raymond James puts the odds of a Republican sweep with Trump as president at 30%, and the odds of a Democratic sweep with Harris as president at 25%. Harris winning with a split Congress is 25% likely, with a Trump win and divided Congress at 20%.
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Each combo portends different policies affecting markets. Taxes are a prominent example. Harris wants to raise the corporate tax rate, and she might be able to do that if she wins with Democratic control of Congress. Trump wants to lower the corporate tax rate and eliminate a variety of other taxes, which he might be able to do if he wins with Republican control of Congress. A divided Congress, with either president, would probably bring the fewest tax changes.
Either president could impact markets through regulation and other executive actions, with no need for congressional action. The biggest changes under Trump would be more tariffs, protectionist trade wars, and the deportation of migrants. Harris would represent more of the status quo, including the ongoing rollout of billions in green energy subsidies and aggressive support for the Affordable Care Act.
Investing firms are busy calculating the first-, second-, and third-order effects of such changes on the value of individual assets. Oppenheimer, for instance, recently highlighted five Trump-friendly stocks and five Harris-friendly stocks. On the Trump ledger: Tractor Supply (TSCO), Goldman Sachs (GS), Tesla (TSLA), Apple (AAPL), and AT&T (T). On the Harris ledger: Five Below (FIVE), KKR (KKR), Sunrun (RUN), AppLovin (APP), and Comcast (CMCSA).
Citi’s election trades range from broad sectors to more arcane plays involving the strength of the dollar and currency exchanges. Solar stocks, for instance, tend to rise when Harris seems more likely to win, and vice versa. Crypto-related assets do better when Trump’s election odds rise. As for the election-related currency trades, it should suffice to say, don’t try this at home.
The overall market might enjoy a relief rally once the election is finally over, but some shares could rise or fall based on expected changes once there’s more clarity about the next four years.
Investing firm Evercore, for instance, points out that the auto and electronics industries would be most exposed to a new Trump trade war. But Trump’s focus on more fossil fuel production could benefit oil and gas producers. Harris wants more caps on drug prices, which could dent drugmaker profits. But her efforts to build more housing could benefit home builders.
Buy or sell accordingly.
There’s also the prospect of a contested election, with no clear winner for days or weeks after Nov. 5. That could spook markets more than any campaign policy. If we dodge that bullet, however, we’ll be back to parsing Fedspeak and scrutinizing economic data in just a few weeks.
It'll probably feel welcome.
Rick Newman is a senior columnist for Yahoo Finance. Follow him on X at @rickjnewman.
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