Investor's Guide to Navigating the Stock Market as Election Day Nears

On Monday, former President Donald Trump surpassed Vice President Kamala Harris in polling support for the first time since August. This follows betting markets indicating a higher probability of a Trump victory in the upcoming election.

The "Trump trade" is gaining traction, but its longevity isn't assured.

Morgan Stanley analyst Vishwanath Tirupattur noted in a recent report that polling indicates a tight race with various potential outcomes for the presidency and Congress. "Given recent market movements and their priced-in expectations, markets could be caught offside if Harris wins, requiring a reversal," he said.

A Citi report underscores that historically, most asset price volatility occurs before the election. As investors increasingly view Trump as the favorite, it might be prudent to secure gains from Trump-related trades now.

Dirk Willer, Citi's head of global macro strategy and asset allocation, stated, "We've been running Trump trades for some time. Despite investors leaning toward a Trump victory, the polling bias is only slightly in his favor. Thus, we are taking profits in some Trump-biased election trades, while maintaining certain positions."

Since 1928, excluding the period until 1980 when U.S. financial markets typically closed on election days, the S&P 500 has averaged a 0.92% gain with a 77% success rate on election day, indicating general optimism. However, the average return drops to -0.71% the following day, suggesting initial excitement gives way to adjustment.

Citi Wealth's Chief Investment Strategist and Chief Economist Steven Wieting stated that the range for U.S. equities on election night spanned about six percentage points. "Markets will rapidly attempt to absorb the implications of the election," Wieting said.

Some analysts argue that elections have a limited impact on markets, which are more influenced by economic fundamentals like corporate earnings and interest rates. Investors are urged to focus on these fundamentals and stick to their long-term strategies rather than attempting to time short-term political or market cycles.

Dennis Chisholm, Fidelity’s Director of Quantitative Market Strategy, notes that financial markets historically show little reaction to presidential and midterm elections. He cautions that trying to adjust investment strategies for expected post-election volatility could be counterproductive. "If you’re an investor, I would suggest that this shouldn’t be something you focus on," Chisholm advises.

Wall Street firms remain bullish on U.S. stocks, citing seasonal tailwinds expected to drive gains through year-end.

Goldman Sachs Managing Director Scott Rubner recently stated that the November 5 election might act as a "clearing event for risk assets," potentially sparking a rally fueled by "FOMO," or "fear of missing out." Stocks are projected to maintain their upward trajectory, in line with historical trends showing strong returns in November and December.

Citi also holds a positive outlook for U.S. equities, maintaining an overweight position despite election uncertainties. The firm expects favorable conditions as the year concludes, with plans to reassess their stance at the start of the new year when seasonal tailwinds may diminish. They anticipate that developments such as a new administration and upcoming labor market data will provide fresh insights.

The fourth quarter features key holidays—Thanksgiving and Christmas—that could bolster investor sentiment and support stock performance. According to Bank of America research, election years often see strong market performance in November and December, with December posting gains more than 80% of the time.

Donald Trump’s policy proposals could advantage sectors like tax reduction, deregulation, cryptocurrency, traditional energy, and infrastructure. Conversely, a Harris administration might prioritize welfare, healthcare, green energy, U.S. export growth, and housing support.

Regardless of the election outcome, gold and cryptocurrencies could gain. Trump has vowed to make the U.S. "the crypto capital of the world," while Harris backs a regulatory framework for digital assets. Election-driven geopolitical uncertainties often boost gold demand as a safe haven.

Our analysis identifies potential beneficiary stocks. Companies poised to benefit under Trump include: