MW Stock-market investors have 'no clear playbook' for Harris election win. Here's why.
By William Watts
Investors look to 2016 for guidance on Trump win: DataTrek's Colas
Investors seemingly know what to do in the event of a victory by Donald Trump in the presidential election next week. A win by Vice President Kamala Harris might leave them temporarily lost, according to a top Wall Street research analyst.
"There is no clear capital markets playbook for a Harris victory, at least based on recent history, and that's both good and bad news," said Nicholas Colas, co-founder of DataTrek Research, in a Tuesday note.
Here's the contrast. In 2016, Trump's election victory saw clear winners, with the S&P 500 SPX outperforming the rest of the world, led by financials and energy while Treasurys slumped, pushing up the 10-year note yield BX:TMUBMUSD10Y. In 2020, President Joe Biden's victory came in the midst of the crisis created by the COVID pandemic, Colas said, clouding any analysis and making it more difficult to write a playbook for a victory by Harris.
As the table above shows, the S&P 500 rose 4.5% from U.S. election day through year-end in 2016, outpacing rest-of-the-world equities, as tracked by the iShares MSC ACWI ex-U.S. ETF ACWX, which fell 1%. Just three sectors outperformed, with financials XLF up 16.3%, energy XLE up 8.7% as oil rallied 19.6%, while materials XLB rose 5.2%.
In 2020, stocks were bounding back from the rout triggered by the onset of the pandemic. The S&P 500 rallied 10.8% between election day and year-end, trailing a 14.7% gain for rest-of-the-world equities, with gains largely attributable to requests and emergency-use authorizations for various vaccines that occurred between Nov. 20 and Dec. 18, Colas said. Again, only three sectors outperformed, with energy topping the gainers with a rise of 29.4% as oil rallied 29% on expectations vaccines would allow economic activity to return to normal, he noted.
In 2016, the most notable move post-election was a 57 basis point rise in the 10-year Treasury yield to 2.45%, Colas said. In 2020, the 10-year yield barely budged, rising 3 basis points to 0.93%, with the Federal Reserve's Treasury-buying keeping a tight lid on rates and tamping down volatility.
While polls still show a too-close-to-call race, betting markets have shifted since September, showing a higher probability of a Trump victory at around 60% on average. As a result, many of those 2016 Trump plays have seen renewed popularity, with Treasury yields on the rise, U.S. large-caps outperforming the rest of the world and financials and energy leading gains.
Read: Robinhood is joining the election-betting party by offering wagers on Harris and Trump
Betting-markets data comes with plenty of caveats, Colas and others have noted. Their record is mixed and investors have raised questions about potential manipulation in some markets as well as other concerns.
See: Wall Street is going all-in on election betting markets. What you need to know.
Moreover, if taking betting markets at face value, a 60% probability means the election outcome is far from a sure thing. That means those 2016-style Trump trades likely have room to run in the event the Republican nominee proves victorious next week, Colas said.
In that scenario, 10-year yields will be the thing to watch, with room to rise further, he said.
A Harris win would leave investors without a clear template, forcing them to refocus on fundamentals rather than past rules of thumb, he said. That's a plus, as U.S. stocks are in good shape, the economy continues to motor along and earnings growth continues to hold up. On the downside, markets may fear incremental regulation and less clarity on the path to the renewal of the 2017 tax cuts.
"In the end, we remain positive on U.S. equities regardless of which candidate wins next week," Colas said.
Check out: Harris trades: These healthcare stocks could rally if she beats Trump
-William Watts
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
October 29, 2024 11:02 ET (15:02 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments