Uncertainty Surrounding the US Presidential Election
Investing.com — Uncertainty surrounding the upcoming US presidential election poses a potential risk for markets, TSLombard strategists said in a recent report.
While a positive macro backdrop has eased fears of recession, the election introduces a new layer of unpredictability, due to the significant divergence in policies between the candidates, Kamala Harris and Donald Trump.
US elections have traditionally been benign for equities, with the market often rallying in the months leading up to and following Election Day. However, this time, the stakes are higher due to the gap in the policies of the two candidates.
“Which way Congress goes will matter, too. Possible post-election legal mayhem adds another layer of risk,” the strategists noted.
While equities generally recover after elections, a historical trend suggests market performance varies based on the party in power.
“When a Democrat candidate has won, stocks were volatile for about six months before taking off strongly. That said, equity performance during Trump’s Presidency was exceptional: S&P 500 gains exceeded 20% within the first year.”
Trump’s economic agenda, which includes reducing corporate taxes and implementing protectionist measures, could spark a market rally if Republicans secure a clean sweep. However, his protectionist stance may raise the specter of higher tariffs, potentially weighing on global economic momentum.
In contrast, Harris’s policies, leaning more toward regulation and social spending, could create a more cautious market environment, especially if Congress remains divided.
“If Congress goes Democrat, Trump’s tax cuts would be harder to implement, leaving investors concerned about the risk of higher tariffs and their possible impact on the economy,” the note continues. “Markets would not favor this combination as much.”
The report also highlights that pre-election uncertainty typically drives volatility, with the VIX rising in the months before the election, only to stabilize afterwards. However, this year’s elevated uncertainty may lead to more persistent market swings and “warrants a degree of caution,” according to TSLombard strategists.
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