How Does the U.S. Election Affect the Stock Market?

In a survey by The Conference Board, consumers believe that the 2024 election will have little impact on the economy. Let's explore how the election might influence the stock market.

Reports indicate that this year's elections in Mexico, India, and Europe have all caused significant volatility in their respective stock markets. The upcoming U.S. election is also expected to be extraordinary. Factors like inflation, interest rates, and geopolitical risks have already heightened uncertainties for the latter half of the year. Adding the election variable into the mix significantly increases the likelihood of stock market volatility. This volatility could start as early as this week, as Trump and Biden are scheduled to have their first debate on Thursday.

Investors will closely scrutinize the candidates' policies on taxes, trade, and immigration. On taxes, the primary focus is on corporate tax rates. Trump has promised to lower the corporate tax rate further to 20% and to make his 2017 tax cuts permanent. Biden, on the other hand, plans to increase corporate taxes and tax the wealthy. He aims to raise the corporate tax rate to 28%, up from the current 21%.

Regarding trade, it is almost certain that U.S. tariffs on Chinese goods will continue to rise. Biden has recently increased tariffs on many Chinese imports, including semiconductors, batteries, solar panels, steel, aluminum, and electric vehicles. Trump has vowed to impose a 60% tariff on some Chinese products and establish a uniform 10% tariff across the U.S. It remains unclear how this comprehensive 10% tariff will impact inflation and the economy. Since tariffs are expected to rise regardless of who wins, attention should be paid to whether this will affect inflation and the Federal Reserve's rate cut plans next year, which could pose some risks.

On immigration, Trump plans to deport illegal immigrants, while Biden focuses on restricting refugee applications. Any effective immigration restrictions could lead to labor shortages, wage increases, and hinder economic growth.

These are the macro-level considerations. On a sector-specific level, if Biden is re-elected, it would be beneficial for the renewable energy sector, including stocks related to solar power, charging stations, and electric vehicles, as Biden and the Democratic Party generally support green energy transition. Cannabis stocks might also perform well, given the Democratic Party's historically supportive stance toward cannabis. Conversely, the financial sector should be cautious. A Biden re-election could mean stricter financial regulations, which would negatively impact stocks like JPMorgan Chase, Bank of America, and Goldman Sachs. The healthcare sector, particularly pharmaceuticals, should also be wary. Biden's policies advocate for lowering drug prices, which could hurt pharmaceutical companies' revenues.

If Trump is re-elected, companies with significant business ties to China, such as Apple, Tesla, Qualcomm, and Broadcom, need to be cautious. Increased tariffs on Chinese goods and Trump's more confrontational stance towards China raise the risks for these companies. The traditional energy sector might receive support, as the Republican Party has always been more favorable towards the oil and gas industry. Trump has promised to lift domestic oil production restrictions. Defense stocks and those related to Bitcoin could also benefit from a Trump and Republican victory. The Republican Party has consistently supported higher defense spending, and Trump has recently expressed support for the cryptocurrency industry, including allowing crypto donations for his campaign.

Another risk worth noting is the increasing popularity of mail-in voting, which could delay vote counting. A contentious election could lead to violence or disputes, causing short-term market panic. For instance, during the 2000 election, Florida faced a recount issue, causing the S&P 500 to drop by more than 4%, the 10-year Treasury yield to fall by 52 basis points, and gold prices to rise as investors sought safe havens.

While the election could bring significant market volatility, investors should remember that historically, the U.S. stock market performs well during election years. The volatility from September to November tends to be higher than in other years, so there is no need to overreact.