2020 US election: Impact on the stock markets

Market Analysis / 5 Min Read
Desmond Leong / 30 Oct 2020

Many of us will be wondering what’s going to happen on the stock markets as we approach the US elections. The vast majority of investors, 93% — believe the presidential race will affect the stock market. But which candidate will move the market the most? And which are the key sectors to watch? 

As we prepare for the results to start rolling in on November 3rd, here are some interesting facts for investors to keep in mind.

Sectors that might see the biggest impact under Biden’s presidency

Although the market is generally expecting a negative reaction to Biden’s presidency (with Democrats favouring a higher tax rate), the tensions over immigration, global trade and China might ease under his presidency. Plus, we might have a larger stimulus package under Biden’s presidency, which could help the US economy recover faster. So the market might not necessarily crash when Biden declares victory. Instead, it might have a neutral or slightly bullish impact on the market, and some sectors are expected to see a bigger impact.

A Biden win may not be favourable for energy investors, but on the other hand, it’s a bright future for clean energy producers. Major stocks such as Tesla, Nikola and Canopy Growth are some of the larger companies investors might want to consider in the Technological and Energy space as Biden has been vocal about his plans to eliminate carbon emissions from the electric sector by 2035

Elsewhere, in the Healthcare sector, there may be uncertainty and volatility as investors are anticipating a tougher stance on drug prices implemented by Biden to reduce the profiteering of the drug industry. On top of that, there are proposals to get rid of private insurance and build on the Affordable Care Act to reduce the complexity that Americans may have faced in the past. Weakness in this sector is expected post-elections, however, it might provide longer-term opportunities. 

Sectors that might see the biggest impact under Trump’s presidency 

One consensus that the market has is that a Trump victory might be the most favourable outcome for stocks. First of all, although Trump has not done a very good job combating Covid-19, the stock market’s performance was quite astonishing during his presidency. From 20 January 2017 until now, the S&P has gone up more than 50%. Indeed, he has been pushing hard for a dovish Fed along the way, which has buoyed the market. More interestingly, data shows that, since 1950, the S&P 500 could advance an average of 9.6% if the incumbent wins the re-election. According to LPL Financial, after the re-elections of presidents Ronald Regan, Bill Clinton and Barack Obama, the stock market soared as much as 30%

Recently, JPMorgan also sided with this bullish view, calling for an increase S&P500 to 3,900, which is a 14% jump of the index if Trump wins the election. 

In comparison to Biden, Trump opposes the attempt to curb global warming, arguing that financial and economic burdens would be imposed. Therefore, the energy sector may continue to flourish as his officials continue to deregulate the laws imposed on mining and fossil energy. Shares of Deere & Co, Paccar Inc and Navistar International Corp all are companies of equipment makers that are looking to rise. Healthcare and drug sectors are looking to rise as Trump said in an interview that he aims to work towards high-quality health care at low prices. Reduced consumer prices will increase the usage of pharmaceuticals. 

To summarize, if Trump is elected for a second term, oil and gas development would strengthen, while equities are also in favour of the incumbent president. 

Generally, SPX might go up in both scenarios

With those differences in mind, let’s look at the long-term picture.

The S&P 500 has shown little variation on growth regardless of whichever party is in the White House; since 1933 there have been seven Democratic and seven Republican presidents, and the general direction of the market has always been up. This is because the S&P 500 is constantly updated with companies that are innovative, technological progress and adaptable. 

More interestingly, data as far back as 1933 shows that regardless of who becomes President, the stock market tends to underperform the following year, with bonds increasing a little more in price than stocks. When a new party takes power, the stock market goes up by about 5% the following year. But if the current president gets reelected, the stock market on average has increased slightly more at 6.5%.

Even with Covid-19, Black Lives Matter, Fires and Hurricanes in the short span of less than a year, the S&P is still up by 9% in the third quarter of 2020 and is expected to climb another 6% by the end of the year. With the stock market flourishing through difficult times, people tend to associate this with the success of the current president and would prefer the win of the incumbent party. 

However, with the happenings of the past year and the expected increase in the number of voters, the favour of the incumbent party may not hold true. But we should always remember that no matter which president wins the election, the current ultra-low-interest rate environment is not likely to change any time soon. The latest survey shows that the ultra-low-interest-rate is likely to be kept until 2024. This could help boost the stock market in the medium term, though we might have shorter-term volatility picking up before and after the election day. This Fed attitude has, to some extent, helped shape the market’s confidence and that’s definitely good news for long-term investors. 

So if you are a longer-term investor, it’s still a good time to stay invested in the market and tune out the noise.

The information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. Readers should seek their own advice. Reproduction or redistribution of this information is not permitted.

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