Investing.com Analysis on US Markets Before Presidential Election

This week, Capital Economics took a closer look at the US markets ahead of the upcoming presidential election.

In a report released Tuesday, the economic research firm highlighted three key points as the tight contest between Donald Trump and Kamala Harris nears its end.

Key Points

1. Uncertainty in Election Results
   Despite President Trump appearing to have momentum, the election remains uncertain. Markets may experience significant repricing post-election.

   Betting markets favor Trump, indicating a close to 50% chance of a Republican sweep. However, critical midwestern swing states show a tight race, and history indicates elections can yield unexpected outcomes.

   > “Trump outperformed the polls in both 2016 and 2020, but a two-sample size is insufficient for strong conclusions,” Capital Economics stated.

   Pollsters have since adjusted methodologies to avoid previous mistakes. Option markets are also reflecting anticipated volatility in the coming weeks.

2. Influence of Election on Financial Markets
   The perception of the election is increasingly affecting financial markets. This is evident in rising US Treasury yields that cannot be fully attributed to economic data or FOMC member commentary, especially given recent drops in oil prices.

   > Capital Economics described the decoupling of these factors as “striking,” noting the historically strong relationship between yields and oil prices.

3. Bond Market Sell-off Challenges Equities
   The bond market sell-off is starting to challenge equities, complicating predictions regarding a Trump victory’s impact on the stock market.
   While a Trump win is generally seen as beneficial for stocks due to potential corporate tax cuts, the S&P 500's performance hasn't aligned with Trump’s improving odds.

   > The firm suggests this misalignment may relate to the bear steepening of the yield curve, which has been linked to recent equity market downturns. “If this continues, a Trump win may be a mixed blessing for equities,” the report concluded.