The US election day is approaching, how to choose investment assets?

Zhitongcaijing · 10/21 13:57

The market will welcome one of the most important events of the year: the US presidential election on November 5.

For Wall Street, at a time when uncertainty about interest rates, labor markets, and the conflict in Europe and the Middle East is already stirring up investors' nerves, competition between US Democratic candidate, Vice President Kamala Harris, and Republican candidate and former President Donald Trump has added to the possibility of turbulence.

Although polls show that the approval ratings of the two candidates are similar, so far, this uncertainty has not bothered investors. The S&P 500 index rose slightly this year, reaching 47 record highs so far in 2024, and the stock market is likely to be boosted again after the general election, just like in history.

An election that is actually like the probability of tossing a coin makes it difficult for traders to bet on what is about to happen. This is probably why betting sites such as PolyMarket and PredictIT are popular, and Trump has become the most popular bet on this site. Similarly, Goldman Sachs's index that tracks the two parties' likely winning trading strategies shows that starting at the end of September, the post-Republican basket of stocks has been rising, while the post-Democratic basket of stocks has declined.

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Taking history as a guide, what impact did the election year have on the market?

An election year is generally favorable for the US stock market. Since 1960, the S&P 500 has risen almost every election year. The only exceptions were 2000 and 2008, which were affected by the bursting of the internet bubble and the financial crisis, respectively. In the recent election cycle, that record looked even better. In the three election years since 2008 — 2012, 2016, and 2020 — the benchmark index has risen by at least 10%.

From a narrower perspective, focusing only on the last seven months of an election year would yield similar results. According to the “Stock Trader's Almanac” (Stock Trader's Almanac) data and analysis, the S&P 500 index has risen 16 times during this period of 18 US presidential elections since 1950. 2000 was a sluggish year, and the other time was 2008.

As for the impact on bonds and the value of the dollar, there was no clear pattern during the election year. For example, the US dollar index, which measures the exchange rate of the US dollar against major currencies, has risen and fallen three times over the past six election years.

Election risks due to equal rivalry or intense competition

There is a reasonable possibility that the election results may not be known until long after election day. Experts pointed out that the election results may be fiercely competitive or evenly matched, which may increase the volatility of various asset classes and even disrupt the boom in the stock market.

During the 2000 Florida election recount battle, as investors poured into safe-haven assets, the S&P 500 index fell more than 4%, 10-year US Treasury yields fell 52 basis points, and the price of gold soared.

The election could end in a protracted dispute or worse political violence, an issue investors are struggling to deal with. If this happens, especially if it also means uncertainty about the final outcome, the stock is expected to fall.

“Panic Index” bets on sharp market fluctuations on election day

Any major event that could affect the economy and disrupt the market can cause trading fluctuations, and elections are no exception. The Chicago Board Options Exchange Volatility Index (VIX) futures curve, also known as Wall Street's “Fear Index,” has historically tended to rise close to election day and then fall back after voting. Barclays strategists said that according to options position data, traders expect the S&P 500 index to fluctuate 1.8% within a day on November 6, the day after the general election.

Like stocks, bonds usually reflect high volatility before the election and then calm down after the election. Since 1988, the bond market's volatility index, the MOVE index, rose an average of 4 points in October during the election year, and fell 7 points in November. Harley Bassman, managing partner of Simplify Asset Management, said that the options market suggests that investors expect US Treasury bonds to fluctuate by about 18 basis points immediately after the election.

Three key issues investors are concerned about

Taxes: Trump has said he will cut the corporate tax rate from the current 21% to 15%, vowed to make the 2017 tax law fully passed by the Republican Party permanent, and urged updates to key parts of the bill. Meanwhile, Harris is pushing to raise the corporate tax rate to 28%. Her plan suggests maintaining the current tax rate for those earning less than $400,000 a year, while increasing the tax rate for high earners.

Trade and tariffs: Trump has talked about imposing full tariffs of 10% to 20%, or even larger tariffs on goods made in China. Although Biden announced an overall increase in tariffs on a range of Chinese imports earlier this year, Harris' campaign information suggests that although she will not be “soft handed,” she sees no benefit from a greater breakdown between the world's two largest economies. Goldman Sachs economists say that if Trump wins, the tariffs he may raise will cause inflation to soar.

Immigration issues: Trump has said he will deport undocumented immigrants. Harris expressed support for an immigration agreement, which includes building an additional barrier on the US southern border; at the same time, the Democratic Party has cancelled asylum applications for immigrants entering the US from Mexico. A J.P. Morgan strategist said that any effective measure to restrict immigration could be a potential driver of inflation if it causes severe labor shortages.

What does it mean for the market if Harris wins?

Stock market: Harris' victory is expected to benefit a range of companies such as renewable energy producers, electric car makers, and even utility companies. However, Harris traded a bigger bet that she could avoid a trade war between China and the US, while Trump made more extreme threatening remarks about tariffs.

Democrats' positive stance on clean energy means Harris' victory will be good news for electric vehicle manufacturers (such as Tesla (TSLA.US), Rivian (RIVN.US), and Lucid (LCID.US)), electric vehicle charging network operators (ChargePoint Holdings (CHPT.US), Beam Global (BEEM.US), Blink Charging (BLNK.US)), and battery makers . PV company stocks, such as First Solar (FSLR.US), Sunrun (RUN.US), and Enphase Energy (ENPH.US), are also expected to perform better under Harris's leadership.

Homebuilders are likely to get a boost as Harris proposes down payment support of up to $25,000 for first time buyers and suggests tax incentives for builders building their first home. Follow stocks such as Houghton Homes (DHI.US), LEN.US (LEN.US), and KB Home (KBH.US).

Under the Democratic Party's leadership, cannabis stocks also generally perform well. Notable stocks include Tilray Brands (TLRY.US), Canopy Growth (CGC.US), Curaleaf Holdings, and AdvisorShares Pure US Cannabis ETF.

Considering that the Harris administration is expected to continue to strictly regulate, place higher capital requirements on banks such as Bank of America (BAC.US), J.P. Morgan Chase (JPM.US), and Goldman Sachs Group (GS.US), and continued pressure on credit card fee revenue, the financial industry's performance may not be that good. Pharmacists may also face regulatory pressure as Harris proposes to cap $2,000 a year on out-of-pocket expenses for prescription drugs.

Bonds: Both candidates have shown no will to control US debt, which will put pressure on long-term bonds over time. However, according to a Bloomberg survey in September, of the two candidates, Harris is considered less hostile to the bond market.

Currency: According to Wells Fargo strategist Aroop Chatterjee, under the Harris administration, uncertainty in US policymaking — from trade and immigration to foreign policy — could put pressure on the traditional safe-haven currency of the US dollar. Analysts at Convera say that if the Democratic Party sweeps the White House and the US Congress, it will lead to an increase in social spending — funded by tax increases — a situation that will also weaken the dollar.

What does it mean for the markets if Trump wins?

Stock market: US stock companies with high income exposure in China may be under pressure if trade tensions escalate. Some well-known companies include chip makers such as NVDA.US (NVDA.US), Broadcom (AVGO.US), and Qualcomm (QCOM.US); materials companies such as Air Products and Chemicals (APD.US) and Celanese (CE.US); and OTIS.US (OTIS.US).

Oil, gas, and traditional energy companies are seen as likely beneficiaries of Trump's victory, as he vowed to lift restrictions on US domestic oil production. Notable stocks include Baker Hughes, ExxonMobil (XOM.US), ConocoPhillips (COP.US), Occidental Petroleum (OXY.US), and Williams (WMB.US), Halliburton (HAL.US), Devin Energy (DVN.US), and Chevron (CVX.US).

Clean energy and electric vehicle companies benefiting from Biden's Inflation Reduction Act are expected to face challenges under Trump as he says he will completely overturn Biden's electric vehicle policy. Companies at risk include Tesla, Rivian, and Lucid, as well as battery manufacturers and component suppliers if Trump removes tax credits for buyers.

Since people expect US defense spending to be a clear Republican priority, defense stocks are expected to perform better during the Republican presidential term. Notable stocks include Lockheed Martin (LMT.US), Northrop Grumman (NOC.US), and Raytheon Technology (RTX.US). Similarly, prison stocks such as GEO Corrections Group (GEO.US) and American Corrections Corporation (CXW.US) are likely to rise, as strict immigration policies will benefit prison facility operators. The stocks of gun manufacturers such as Smith & Wesson Brands (SWBI.US) and Sturm Ruger (RGR.US) also tend to rise as the Republicans win.

Cryptocurrency stocks have recently been seen as a major area for “Trump trading,” as the former president's attitude towards Bitcoin and other digital assets has changed drastically since taking office, and even promised to make the US the “cryptocurrency capital” of the world. Notable stocks include Coinbase Global (COIN.US), Marathon Digital Holdings (MARA.US), Riot Platforms Inc. (RIOT.US), Cleanspark Inc. (CLSK.US), MicroStrategy Inc. (MSTR.US), and Cipher Mining Inc. (CIFR.US), and Bitwise Crypto Industry Innovators ETF.

If Trump and his campaign partner Senator JD Vance win, the stock prices of the two media companies, the parent company of Trump Media and Technology Group Inc. (DHT.US) and the video-sharing platform Rumble Inc. (RUM.US), may rise. The former was mostly owned by former President Trump, while the latter was held by Vance's venture capital firm Narya as of May this year.

Bonds: In the bond market, Biden's poor performance in the debate at the end of June seemed to clear the way for Trump to re-enter the White House. Since then, bets that long-term bond performance will be inferior to short-term bonds have become popular, and this bet has always been very attractive. This bet — called a “Trump deal” by bond investors — could get extra ammunition from the Federal Reserve's interest rate cuts. Federal Reserve policymakers cut interest rates by 50 basis points in September.

Currency: Wall Street strategists generally believe that Trump's tariff policy will support the US dollar and damage currencies such as the Mexican peso for at least the short term. But Trump also believes that the US dollar is too strong as the world's reserve currency. It remains to be seen how he balances these competing views.