After Donald Trump seemed to beat Vice President Joe Biden in Thursday’s presidential debate, the U.S. stock market didn’t go through the roof. Still, people in the market may be getting more and more excited about the possibility of a Trump victory.
That guess may or may not come true in a race that is still very close between two unpopular candidates. History shows that investors should try to keep their partisan feelings out of their portfolio choices. This is especially important right now, when the race for president is going through all of its usual ups and downs.
Ken Lerner, chief market strategist at Truist, told MarketWatch over the phone that election season “tends to be a very emotional time and people tend to make decisions based on emotion.” “Other things are more important.”
Stock-index futures, the dollar, and other assets went up overnight after Thursday’s presidential debate, where Biden gave a stumbling speech. Trump seemed calmer, but he told a lot of lies about the economy, the attack on the Capitol on January 6, 2021, and other things. Democrats were scared by Biden’s performance, and there was talk that the president might step down for another candidate before the Nov. 5 election.
But the market as a whole didn’t react much. After getting close to records, the S&P 500 index SPX and the Nasdaq Composite COMP both went down on Friday. The Dow Jones Industrial Average (DJIA) also ended the day a little lower. The rally lost steam when a Treasury rally that was supposed to push yields down turned around and pushed yields back up. Some traders blamed worries about the possibility of growing government budget deficits for this.
Still, the fact that the dollar and stock futures went up right after the debate shows that investors are becoming more sure that Trump will win, according to a note from Solita Marcelli, global wealth management chief investment officer for the Americas at UBS.
People often say that the market is optimistic about Trump’s chances because they think that a new Trump administration will keep or even expand corporate tax cuts and cut regulations.
Jeff deGraaf, chairman and head of technical research at Renaissance Macro Research, said on Friday that the negative correlation between Biden’s popularity and the performance of the S&P 500 index is the best predictor of stock market performance. This is true even though it is not statistically significant. It is better than oil prices, Treasury yields, Federal Reserve policy, corporate bond spreads, purchasing manager index readings, inflation data, and gross domestic product (see chart below).
There is some reason why stocks (SPX) have been so stubbornly strong in 2024, according to the data, he wrote. “We have always maintained (and continue to believe) that a bearish narrative based off of a U.S. political candidate is a bad bet fueled more by ideological hysteria and less on sober analysis, historical facts or belief in the ingenuity of the human spirit,” he added.
In fact, Marcelli said that academic research shows that a person’s political views have a direct effect on how optimistic they are about the future of the economy.
“This partisan bias is a dangerous element for investors, especially in a politically charged election year,” she wrote. “It can cloud one’s objective assessment of risk and change how they invest.” If you look at the big picture, the U.S. election results are not what really affects economic growth and stock market returns around the world.
Lerner from Truist told MarketWatch that the real drivers of the stock market’s rise from last year’s October lows have been expectations for economic growth and earnings from companies. He said that at the start of the year, expectations for the economy and earnings were also too high. Now, they’re more in line with Truist’s expectations, he said.
The stock market, on the other hand, has done very well this year, rising 14% in the first half. This looks like it will continue, no matter how the presidential campaign goes. The S&P 500 has gone up 10% or more in the first half 23 times since 1950, if you don’t count 2024. Lerner said that stocks went on to gain more in 19 of those 23 years, giving an average gain of 7.7% in the second half.
Also, analysts have noticed that stock prices have been rising during presidential election years, such as the time from June to October. When it’s clear who will win, the stock market tends to go up. But when an election is close, the market can go through periods of volatility.
Lerner told investors that they should be ready for that to happen. He said that in the long term, it’s important to remember that stocks have done well and consistently over the last three presidents, with annualized returns of 12% to 15%.
But, he said, the path of inflation, interest rates, and whether the Federal Reserves can steer the economy to a soft landing will probably end up being more important in the end.
