Key Issues for Investors
What the Biden-Trump Debate Means for the US Stock Market
Potential for High Uncertainty
As the US presidential election approaches, investors are bracing for potential volatility. Here's a look at how the rematch between President Joe Biden and former President Donald Trump might impact the stock market.
Historical Election Year Performance
- General Trend: Historically, election years have been positive for the US stock market. The S&P 500 Index has risen in almost every election year since 1960, except for 2000 and 2008.
- Recent Cycles: In the last three election years (2012, 2016, 2020), the S&P 500 rose at least 10%.
- Last Seven Months: Focusing on the last seven months of an election year, the S&P 500 has risen in 16 out of the 18 presidential elections since 1950.
Potential for High Uncertainty
- Close Election Risks: A close or contested election result, similar to the 2000 Florida recount, could lead to market volatility. In 2000, the S&P 500 fell more than 4%, 10-year Treasury yields dropped 52 basis points, and gold prices surged.
- Fear of Political Violence: Investors are concerned about the possibility of political violence or a prolonged dispute over the election results.
Market Volatility Indicators
- VIX Futures Curve: The Chicago Board Options Exchange Volatility Index (VIX) futures curve indicates that traders are preparing for potential stock-market swings around the November election earlier than usual.
- Policy Uncertainty: Despite some preparation, strategists at Bank of America note that current levels of policy uncertainty and the VIX are still low, suggesting the market hasn't fully priced in potential political uncertainty.
Key Issues for Investors
- Tax Policies:
- Trump: Promises to lower the corporate tax rate to 20% and make the 2017 tax law permanent.
- Biden: Reports suggest Democrats are planning to raise taxes on corporations and the wealthy.
- Trade and Tariffs:
- Trump: Advocates for a 10% across-the-board tariff and higher levies on Chinese goods.
- Biden: Proposes sweeping tariff hikes on Chinese imports, including semiconductors and electric vehicles.
- Immigration:
- Trump: Plans to deport undocumented immigrants.
- Biden: Has implemented measures to reduce asylum claims until border crossings decrease, which could impact labor supply and inflation.
Sector Impacts of a Biden Win
- Positive:
- Clean Energy: Beneficiaries include EV-makers and solar stocks.
- Cannabis: Typically performs well under Democratic administrations.
- Negative:
- Financials: Likely to face continued regulatory pressure.
- Drugmakers: May face price reduction pressures from the Inflation Reduction Act.
Sector Impacts of a Trump Win
- Positive:
- Oil and Gas: Likely to benefit from pro-oil policies.
- Defense: Expected to see increased spending.
- Cryptocurrency: May gain from Trump's recent focus on digital assets.
- Negative:
- Clean Energy: Could face challenges from policy reversals.
- China-Exposed Companies: Chipmakers and other firms with significant revenue from China may face disruptions.
Conclusion
While elections bring uncertainty, historical data suggests that election years often result in positive stock market performance. However, the potential for a close or contested election could lead to heightened volatility. Investors should focus on key policy areas such as taxes, trade, and immigration, which could have significant sector-specific impacts depending on the election outcome.