Election Outcome: A Mixed Bag for the Stock Market
As the U.S. presidential election approaches, investors are bracing themselves for the potential impact on the stock market. According to Tom Essaye, founder of Sevens Report Research, two out of three possible election outcomes could lead to further gains for the market. However, there’s a significant wildcard to consider.
Republican Sweep: A Short-Term Boost
A Republican sweep, where former President Donald Trump wins and the GOP controls both the House and Senate, is likely to be the most positive outcome for stocks in the short term. This scenario would likely lead to an acceleration of the stock market rally into year-end, driven by expectations of pro-growth policies and tax cuts. However, Essaye warns that this outcome would also lead to an uptick in volatility in 2025 as concerns about deficits and debt become more pressing.
Harris Win with Divided Congress: A Steady Climb
If Vice President Kamala Harris wins the election and Congress remains divided, the stock market is likely to continue its steady climb. This outcome would remove the risk of disruptive policies and allow investors to focus on positive macroeconomic fundamentals, such as solid growth, Fed rate cuts, and declining inflation.
Democratic Sweep: A Negative Outcome
A Democratic sweep, where Harris wins and the Democrats control both Congress and the White House, would be a negative outcome for the stock market. Investors would likely worry about increased regulation and tax increases, leading to a sell-off. A decline of 1% or more wouldn’t be surprising, and a pullback of 5% to 10% would be likely in the weeks following the election.
The Role of Treasury Yields
Treasury yields have risen sharply since mid-September, driven in part by expectations of larger budget deficits under a Trump administration. The 10-year Treasury yield has risen from around 3.6% to 4.35%, a level that has raised concerns among some analysts. While Essaye believes the rise in yields wouldn’t be enough to dent growth expectations in the short term, an elevated 10-year yield could become a significant headwind for stocks in 2025 as investors learn more about actual policies.
Stock Market Performance
Despite the uncertainty surrounding the election, stocks have shown strong gains, with the Dow Jones Industrial Average up 11.7%, the S&P 500 up 21%, and the Nasdaq Composite up 22.7% so far in 2024. The market has largely moved sideways in recent sessions, but a Republican sweep could lead to an acceleration of the rally into year-end.
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