Impact of Election Scenarios on Financial Assets: Historical Trends and Analyst Insights

As voting unfolds on Nov. 5 in the U.S., investors are keenly watching the election results, which could sway cross-asset performance based on the presidency and Congress outcomes. The four scenarios in play are a Republican Sweep, a Democratic Sweep, Trump with a Split Congress, and Harris with a Split Congress.

The chart below illustrates average asset returns during presidential terms under various scenarios since 1945. Historically, during a Republican Sweep, copper has averaged a 52.5% return, while gold has led with a 61.1% average return in a Democratic Sweep. It's crucial to note that past performance isn't indicative of future market reactions.

Wall Street analysts have recently assessed the market's short- and medium-term reactions following the election. Scenario analysis is not about betting on a specific outcome; it potentially aids investors in managing risks during the election and in preparing to capitalize on market overreactions.

Tax cuts from Trump’s previous term may continue, potentially boosting equities through tax relief and deregulation. However, concerns about higher tariffs, trade war costs, and inflation might partially offset these gains.

The financial and traditional energy sectors could be key beneficiaries of deregulation. JPMorgan suggests sectors with significant global trade exposure, such as technology and communications, might suffer under a Republican sweep. This scenario may prompt investors to shift from overvalued growth stocks to value and domestic equities.

This scenario also represents the most fiscally expansive option, leading investors to focus more on US debt levels.

According to JPMorgan, a Republican sweep could strike a delicate balance between economic resilience and inflation pressures, likely steepening the US yield curve. The bank’s rates team expects the 10-year Treasury yield to rise by 30-40 basis points, driven by anticipated fiscal expansion.

Citi predicts that if Trump wins, especially in a “red wave” scenario, copper prices might experience a short-term rebound similar to post-2016 election trends. Back then, both copper prices and US stocks rallied, supported by a strengthening Chinese economy, which is currently improving as well.

Market sentiment broadly suggests gold faces short-term pullback risks, though medium-term fundamentals remain strong. Citi notes potential tactical selling of gold, citing the 8.2% one-month drop following Trump’s 2016 victory. Regardless of the election outcome, the Fed’s rate cut cycle, global central bank gold demand, and overall currency depreciation trades will persist as supportive factors.

With limited policy changes expected, the impact on financial markets may be relatively minor.

Morgan Stanley suggests that if Harris assumes the presidency with a divided Congress, consumer stocks affected by tariffs and renewable energy equities could outperform the broader market in the short term. Additionally, falling interest rates may benefit housing-sensitive consumer stocks, while financials, industrials, and commodity-sensitive sectors might underperform.

Major fiscal policy reforms are likely to face challenges due to a divided Congress.

Morgan Stanley suggests that in this scenario, macroeconomic conditions and stock fundamentals will play a more critical role in determining sector price movements towards the year's end. Additionally, tariff risks remain a concern until clearer policies emerge. Consumer stocks affected by tariffs are expected to continue underperforming.

Seen as least favorable for equities due to higher corporate tax prospects.

JPMorgan expects environmental and healthcare reforms to boost solar, wind, battery storage, electric vehicles, and healthcare services. Citi anticipates reduced tariff uncertainties under Harris, supporting copper prices.

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