To The Moon

Hello Tigers,

This is my latest opinion piece on the impact of the US elections on the markets published on the New Zealand Herald today. Hope it helps you more on the understanding of current market.

New Zealand Herald Link>>

KEY FACTS:

• The US presidential election is on November 5 and advance voting has started.

• Candidates Kamala Harris and Donald Trump have some different visions of the government’s role, on taxes, and fixing America’s cost of living.

• Harris questioned Trump’s mental state today after the 78-year-old Republican’s latest televised town hall rally veered into an impromptu music session.

1. OPINION

Given the variables and complexities of the United States’ political structure and state-by-state electoral processes, it would be a fool’s errand to try predict who will become President after November 5.

But we can draw on decades of data to foresee how markets might respond to either candidate’s ascension to the country’s highest office.

Based on past events and the response of markets to new Democratic and Republican Presidents, here is what we know about what is happening pre-election and what we can extrapolate for the history-making weeks to come.

2. Declining inflation favours the incumbent

Inflation in the US peaked at 9.1% in June 2022 but as of August 2024 had dipped dramatically, reaching a three-year low of 2.5%.

Where inflation sits can have a direct effect on the cost of living for everyday people, and on the face of it, this decline should have many voters viewing the current Democrat-led regime more favourably as they head to the polls.

Source:twww.usinflationcalculator.com/

3. A shift in leadership caused a pre-election bump

When President Joe Biden dropped out of the presidential race and endorsed Vice-President Kamala Harris on a Sunday in July, it was an event many had called for after a disastrous debate performance but some of his closest aides weren’t told about it in advance, and the markets had not priced it in.

By close of business that Monday, the verdict from the global markets was in: the $.DJI(.DJI)$ was up 0.3%, the $.SPX(.SPX)$ closed up 1.1%, and the $.IXIC(.IXIC)$ gained 1.6%.

According to CNN, “European markets also closed higher and Asian markets closed mostly lower. US Treasuries rose slightly, trimming yields, and the dollar was softer against major currencies. Much of Monday’s gain came from a rebound in tech stocks. Nvidia gained 4.8% while chipmaker Advanced Micro Devices was up 2.8%.”

The same report noted that the so-called “Trump trade” (i.e. investors buying stocks they believed former Republican President Donald Trump’s pro-tariff agenda could boost), which had grown amid doubts about Biden’s viability as a 2024 candidate and had Wall Street pricing in a Trump victory this year, would begin to unwind.

US Vice-President and Democratic presidential candidate Kamala Harris and former US Representative Liz Cheney, a Republican, arrive for a campaign event at Ripon College in Wisconsin, on October 3. Photo / Kamil Krzaczynski, AFP

4. The performance of the $USD Index(USDindex.FOREX)$ offers clues

Analysts have observed that the value of the dollar has increased against other currencies at times when expectations for a Trump re-election have strengthened.

After the debate between Trump and Harris on September 10, in currency trading the US dollar fell to 141.72 Japanese yen from 142.41 yen, and the euro cost $1.1036, up from $1.1023.

5. The $.SPX(.SPX)$ ′s verdict

The S&P 500 is a bellwether for how the stock market will be affected by a change in the US president.

The November 5 election is somewhat unusual, historically speaking, in that there is guaranteed to be a new presidential administration but one of the two contenders has held the office before, so is not an unknown quantity for the markets.

• What we know is that the markets strongly favour a Republican president: in all election years between 1928 and 2016 when a Republican was elected, the average annual $.SPX(.SPX)$ return was 15.3%.

• When a Democrat was elected, the $.SPX(.SPX)$ return was a markedly lesser 7.6%; and the average in all election years was 11.28%.

Spy During Election Years,Source

• When Trump was elected in 2016, the bump was a solid 12% - lower than the Republican-winner average but higher than Bill Clinton’s first-term win of 7.7%.

• When Clinton won a second term in 1996 the $.SPX(.SPX)$ surged up 23.1%, reflecting the perception of Clinton as a strong steward of the economy. And the record low -37.0% return after Obama’s first election in 2008 was less about the advent of America’s first black president than the catastrophe of the GFC.

• The markets do offer a resounding response to poor or underwhelming performance regardless of political stripe.

• After Reagan’s first election in late 1980, the $.SPX(.SPX)$ rose an astonishing 32.4%, higher than in any election since Franklin Roosevelt in 1936.

Elon Musk throws his hands in the air and jumps while attending a campaign rally for former President Donald Trump, the Republican presidential nominee, in Butler, Pennsylvania, on October 5. Photo / Doug Mills, the New York Times

On Reagan’s re-election in 1984, the market rose 6.3%, delivering an investor and fund manager judgment that America had not, in fact, become great again since the 1981 inauguration.

One more data point will be interesting for investors to watch given that the outgoing president is a Democrat.

Since 1928, when a Democrat was in office and another Democrat was elected, the total return for the year averaged 11.0%. But when a Republican was elected to replace a Democrat, the total return averaged 12.9%.

Experienced investors are skilled at analysing the wider context when making decisions – they will account for everything from leadership and the remuneration of key executives to profitability and the effect falling interest rates might have on the R&D profiles of companies they are tracking.

They will be looking at the kind of data we have laid out here, and tracking market responses to major events and announcements on the election trail between now and November.

But we know voter behaviour can be driven as much by people’s emotions and instincts as the candidates’ policy positions. To the extent Wall Street is pricing in a victory in either direction, it can do so only with extreme care.

Disclaimer: This information is not financial advice, and has been prepared without taking into consideration an individual investor’s own objectives, financial situation or needs. Any third party’ content referred to has not been assessed or endorsed by Tiger.