A look at what could happen to the stock market after this week’s presidential debate
Financial markets lost their direction last week, with Wall Street posting only modest gains. S&P 500 Up 0.6% Nasdaq 100 Just 0.2%. Government bond yields have recovered slightly after recent declines. Gold prices are stable and the US dollar has edged up against the euro for the fifth straight week. Oil prices are rising, but Bitcoin (BTC-USD) continued its gradual decline. Going forward, key factors will influence market sentiment and direction.
For one, stock market analysts are also looking forward to the nation’s first presidential debate between President Joe Biden and President Donald Trump.
According to David Cohen, the US ambassador to Canada, the debate is as important as it is a demonstration of democracy. In an interview with CTV’s “Question Period,” Cohen emphasized his apolitical stance and expressed his excitement about the debate. He believes it will be a public forum for candidates to present their policies.
The Ambassador stressed the importance of debates in democracy and the electoral process. CNN and CTV News Channel hosted a historic debate between the current and former presidents, which was crucial for both candidates in battleground states. The Ambassador underscored his concern that foreign interference is a serious threat to democracy.
U.S. intelligence agencies were keeping a close watch and prepared to provide information to the public if necessary. After reports that members of Congress and Senators may have unintentionally or knowingly aided foreign powers, debate in Congress centered on allegations of foreign interference and treason.
How the presidential election will affect the stock market
Media interest in the event is at its peak as the election approaches, with Biden and Trump scheduled to debate on June 27. So far, the market impact of this ongoing election campaign appears to be minimal, reflecting the uncertainty of voter opinion polls. Rob Howarth of U.S. Bank Wealth Management highlighted the role that unified government control will play in policy changes, stimulating investor interest in potential changes.
Notably, the election also includes a vote for one-third of the Senate and 435 seats in the House of Representatives. With policy outcomes unclear, investors are closely watching the potential impact on companies and markets.
Strategists at U.S. Bank looked at market data going back to 1948 and analyzed returns in the three months following an election against historical averages. They used t-tests to evaluate the impact of political control on the performance of the S&P 500 and found consistent results across different periods of government control.
Historical analysis challenges the notion that market turmoil follows single-party control of the White House and Congress. The analysis found no significant correlation between such control and market performance. Rather, positive market outcomes have been associated with divided government scenarios, such as Democratic control of the White House and Republican control of Congress, or a divided Congress.
Investors will likely be watching these debates (and the upcoming election results) closely for their impact on the stock market. However, historically, economic and inflation trends have a significant impact on portfolios. Economic growth and low inflation have typically been correlated with above-average returns, while economic slowdowns and rising inflation have led to positive but subdued market performance. Understanding these patterns is critical for investors looking to forecast market trends beyond political events.
Why should investors care?
Thursday’s debate came in the wake of unexpected recent election results in India, Mexico and France that have rattled global markets. Unlike past U.S. debates that have come as elections have approached, many brokers and asset managers are advising clients to lock in their portfolios early as such events could cause market volatility. For example: Goldman Sachs (New York Stock Exchange:GS) Strategist Vicky Chan said debates have historically changed the outlook for asset markets and elections.
Ahead of the next debate, we recommend considering election exposure and protection earlier than usual. Financial markets historically react quickly to US presidential debates. In 2016, S&P 500 futures rose 0.7% during the first debate in anticipation of a Clinton victory.
A similar trend in favor of Biden was seen in 2020, but to a lesser extent. Goldman expects the first debate to bring attention to the election sooner than in previous years. A Trump victory could lead to significant policy shifts, especially affecting international trade with China. City (New York Stock Exchange:C) Currency team predicts a “Trump Red Wave” and sees the US Dollar rise 5%.
Moreover, Citi’s equities division is avoiding China, while acknowledging opportunities in the technology sector. Strategist Adam Pickett is bullish on China, citing undervalued AI companies. However, he advises caution until after the US elections, given the potential for tariff pressure under President Trump. In contrast, Black Rock (New York Stock Exchange:black) expects prolonged inflation and rising interest rates regardless of the election outcome, and is preparing for sustained U.S. fiscal deficits after the election.
Opinion polls show caution
The largest asset managers were cautious about long-dated U.S. Treasuries before the election but favored U.S. stocks. Goldman Sachs noted that unusually low volatility offers a cheap hedging option. Recent election results in emerging markets and Europe, as well as huge foreign outflows from India of $3 billion, for example, are already impacting global investor sentiment.
Additionally, Indian stock markets fell 6% after Prime Minister Narendra Modi’s ruling party lost its majority in parliament, causing investors to reconsider their bets.
At the same time, Latin American markets also faced some setbacks with the election of Claudia Scheinbaum as president and the victory of her Morena party. Constitutional reforms caused the peso to fall 10% against the US dollar.
Stress was added to markets around the world after French President Emmanuel Macron announced early general elections following the strong performance of his far-right National Rally party in the European Parliament elections, raising concerns about political instability in France.
Conclusion
According to Ned Davis Research, the S&P 500 posted its best first half performance in an election year since 1976. The index is up 15.2% year to date, even as the Federal Reserve keeps interest rates above 5%.
Wall Street has been growing bullish on AI-related stocks amid softening economic data and hopes of interest rate cuts. Historical trends favor election-year rallies, and momentum suggests the uptrend will continue through November.
The Biden-Trump rematch is well underway, pending certification at the party conventions over the summer, and uncertainty over control of Congress in 2024 adds an additional layer of complexity. With all the talk of the election, it’s prudent to monitor sectors that are vulnerable to policy changes, but keeping an eye on economic indicators and inflation remains important for informed investment decisions.
On the date of publication, Chris McDonald did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the author in accordance with InvestorPlace.com’s Publishing Guidelines.
