The Impact of Different Possible U.S. Presidential Election Outcomes:
1) While Trump and Harris’s policies differ widely, they would not significantly affect the stock market in the event of a split Congress.
Regardless of the U.S. presidential election outcome, extreme policies that could disrupt the business cycle and change the trajectory of the economy are less likely to be enacted in the case of a split Congress, such as when the House is controlled by Democrats and the Senate by Republicans.
As a result, the U.S. stock market could rise further after the election if a split Congress occurs.
Some investors argue that Trump’s plan will stoke inflation risk. However, I reckon investors would priced in a stronger economy and corporate earnings under trump and would have worried inflation risk down the road. Thus, investors should not pay too much attention to potential inflation risk yet.
2) Republican Sweep Could Be Good for Stocks
Investors are now predicting a Trump win and a possible Republican sweep, driving early optimism in the markets.
The odds of a Republican sweep have increased from 43% on October 20 to 46% on October 27, according to the betting site Polymarket. In 2016, the Republican sweep of the House, Senate, and presidency led to a 5.4% rise in the S&P 500 between November 8, 2016 (U.S. presidential election day), and the end of the year.
Therefore, the recent stock rally in October is largely due to investors front-loading the expected Trump sweep, anticipating a repeat of the 2016 post-election rally.
Trump’s proposed expansionary fiscal policy is viewed as more favorable for the stock market compared to Harris's policies.
His deregulatory push, corporate tax cuts, and extension of the 2017 Tax Cuts are seen as positive for investors.
Some investors argue that Trump’s plan may lead to increased inflation risk. However, I believe investors are currently focused on pricing in a stronger economy and improved corporate earnings under Trump, with concerns about inflation arising later. Therefore, investors should not be overly concerned about potential inflation risks at this stage.
3) The Stock Market Could Fall on a Harris Win
Market participants are concerned about a Harris sweep, where Kamala Harris wins the presidential election and Democrats control both the House and Senate.
Her proposed corporate tax hike, plans for realized and unrealized capital gains taxes, and stricter regulatory enforcement do not bode well for investors.
Conclusion:
The election odds favor a Trump win and a split Congress, both of which could be positive for investors. Therefore, I remain optimistic about U.S. stocks post-election.
Recently, several analysts have discussed the concept of "animal spirits," referring to the idea that the market continues to rise due to investor sentiment.
I reckon we are likely to see high animal spirits following the U.S. election. Some investors and funds have been underinvested to avoid election uncertainties, but I anticipate they will return to U.S. stocks after the election.
Additional factors that could sustain a rally through the year-end include:
Increased Stock Buybacks:
U.S. stocks may continue to rise as corporate share buybacks resume with the expiration of the earnings-season blackout period this week.
FOMO (Fear of Missing Out):
The S&P 500 ($SPDR S&P 500 ETF Trust(SPY)$ ,$iShares Core S&P 500 ETF(IVV)$ ,$Vanguard S&P 500 ETF(VOO)$ ) and Nasdaq-100 ($Invesco QQQ(QQQ)$ ) have gained 23% and 22%, respectively, so far this year. Funds that have underperformed their benchmarks will likely scramble to enter the equity market in an effort to catch up in the final two months of the year.
Comments
"The S&P 500 ( $SPDR S&P 500 ETF Trust(SPY)$ ,$iShares Core S&P 500 ETF(IVV)$ $Vanguard S&P 500 ETF(VOO)$ ) and Nasdaq-100 ($Invesco QQQ(QQQ)$ ) have gained 23% and 22%, respectively, so far this year. Funds that have underperformed their benchmarks will likely scramble to enter the equity market in an effort to catch up in the final two months of the year."