Do US elections change markets? Some interesting anecdotes…
While US presidential elections generate significant news flow, hypes, theories and even riots, the short- to medium-term impact on stock market dynamics has historically been limited. This is not to say that markets ignore the outcome of the election, but investors tend to focus on macroeconomic, geopolitical, and corporate earnings data and forecasts that were already in place prior to the election. This means that rather than seeing new trends, we may see some acceleration of existing ones, for example, within equity sectors, styles and geographies, as well as for the US dollar and US bond yields. However, markets may experience strong to erratic moves close to the election results, especially for equities.
In this sense, eight years ago we were part of one of the strongest reactions when Mr Trump was surprisingly announced as the next president, defeating the highly favoured Democratic candidate, Mrs Clinton, who was the absolute leader in the polls. This was a shock event as the financial markets were not prepared for such an outcome, with US stock futures plunging around 5% in early trading, sending markets in Asia & Pacific (Japan closed down 5% in early morning trading) and Europe lower as well. However, this move turned out to be a hysterical reaction to something unpredictable. But it did not last long, as the overnight panic evaporated during the day, with European and U.S. markets even closing strongly in positive territory. An amazing intraday “V-shaped recovery”! Since then, the markets have continued their previous path, confirming that they are more focused on the existing and future macro environment.
This has also happened in difficult times, such as in 2008, when the US election was held in the midst of the global financial crisis meltdown, with equity markets continuing the negative trend that had been in place prior to the election. Another interesting anecdote relates to 2000, when the election result was not officially confirmed until a month after the election, as the outcome in the decisive state of Florida was too close to call and required a recount, which was then stopped by the Supreme Court before it could be completed. Ultimately, Mr Bush Jr won Florida by 537 votes (a margin of 0.009%) in what will be remembered as one of the closest and most controversial elections in American history. The stock markets reacted negatively for two main reasons: first, markets don’t usually like uncertainty, and then they continued their negative trend that started with the bursting of the dot-com bubble months earlier.
2024 election: Results and early market reaction
Republican ex-President Donald Trump was elected the 47th president of the United States, defeating Democratic vice president Kamala Harris with 312 electoral votes to 226, winning all seven swing states and, most importantly, the popular vote (50% to 48.3%), the first Republican victory in 20 years. Trump will also be the second president to serve non-consecutive terms. Along with this victory, Republicans also regained control of the US Senate, which would give Trump the pride of having the support of both houses of Congress, which should allow for fewer obstacles in passing his legislative priorities, as president Joe Biden enjoyed in the first two years of his current term.
While opinion polls suggested a close race, financial markets appeared increasingly confident of such an outcome, with stocks, the US dollar and Treasury yields all rising, as they have in recent weeks leading up to the election. If there was a surprise for the markets, it was that a clear result was announced within hours, so that fears of a very close or even contested result did not materialise, and the Senate was also called for the Republicans very soon, so that markets in Asia started to react early. US equities closed the strongest globally, with the Dow Jones, S&P 500 and Nasdaq hitting new all-time highs. European indices, on the other hand, after a good start, gave up all their intraday gains and even closed down. At the same time, bond markets also lost ground, with the 10-year U.S. Treasury yield rising sharply and the US dollar climbing to new highs so far this year in the currency market. This could lead to the initial conclusion that this election was a pure US call, stronger than eight years ago and fully in line with the American political slogan “Make America Great Again.”
What can we expect?
With the election behind us, it will now be important to see how the policies of the new administration could affect global markets. At this stage, the new Trump presidency, combined with Republican majorities in both houses of Congress, should be positive for riskier assets, especially in the US. As in the previous Trump presidency, the materialisation of corporate tax cuts, deregulation and tariff hikes would be positive for US equities and corporate bonds, even if this may lead the Federal Reserve to cut interest rates at a slower pace than expected. For government bonds, this means a less positive outlook, with concerns about rising government debt and a higher inflationary environment likely to push bond yields higher.
US equities should continue to outperform the rest of the world, even considering valuations, which are currently quite high and could be further supported by tax cuts. US small caps are seen as one of the biggest beneficiaries of Trump’s programme due to his protectionist stance and corporate tax cuts. Indeed, the Russell 2000 Index was the outperformer in the immediate aftermath of the election, jumping nearly 6% to its highest level since 2021. At the sector level, financial services, healthcare, defence, fossil fuel companies and cryptocurrency stocks should outperform clean energy and electric vehicle companies, as well as battery makers and companies with high revenue exposure to China.
In the currency markets, the US dollar should be supported by a higher interest rate differential compared to most developed currencies, and an environment of trade wars and geopolitical risks should also provide further support for the greenback. The future is also challenging for emerging market currencies, which could suffer from higher US interest rates and weaker global trade growth.
Gold is seeing some of the catalysts that have underpinned its rally, such as falling interest rates, a perceived weakening of the US dollar, geopolitical tensions and Chinese distrust in their stock and property markets, come off. But that does not mean it is ready for a turnaround. In the longer term, the increasing debasement of paper money (profligate government spending) may attract investors to gold as a store of value.
Conclusion
To summarise, we have seen that the US elections do have an impact on the financial markets, but usually not with such dynamism to change existing trends. The recent election was a big triumph for Trump, with US stocks and dollar celebrating, bitcoin cheering. Portfolio managers are now faced with the challenge of whether it still make sense to change allocations where trends have accelerated after the election, in both directions, up and down. In any case for portfolio managers there is no shortage of unknowns, information, theories, convictions, recommendations and so on, but at the end of the day, it is the markets that matter, and markets are always right. And day after day, it’s here we go again!
Ingo Werner is portfolio manager at ING Luxembourg.