Most of 2024, investors in the stock market didn’t seem to care whether Donald Trump or Kamala Harris won the presidency. That is, until this week, when investors started to worry about the election with less than two weeks to go.
This week, a sharp rise in Treasury yields since September has shook up the U.S. stock market and raised fears that the selloff could stop this year’s record-setting run in the last few days of the election.
On Wednesday, U.S. stocks fell. The S&P 500 SPX fell 0.21% and the Dow Jones Industrial Average DJIA fell 0.30%, both by almost 1%. Both measures went down for three days in a row, which was the biggest drop in three days since early September. The tech-heavy Nasdaq Composite COMP 0.57% fell 1.6%, making it the worst day for the stock market since September 6.
Long-term Treasury yields rose to their highest level in almost three months during the selloff. This was due to worries that the upcoming U.S. election could make the government’s budget deficit worse. Also, the rising chances of a Trump presidency in a race that is still too close to call and the belief that the Federal Reserve will ease monetary policy less sharply in November both put pressure on the financial markets.
Traders seemed to be most worried about the fact that both Harris and Trump have proposed policies that will likely make inflation, interest rates, and deficits worse. However, Brad Neuman, senior vice president and director of market strategy at Fred Alger & Co., told MarketWatch over the phone that Trump’s proposals were likely to be worse.
Yes, Treasury yields TMUBMUSD10Y 4.238% have gone up since the Fed began lowering interest rates in the middle of September. This is because new economic data shows that the economy may be doing better than most people thought it would. Even though there was doubt about politics and interest rates, the stock market stayed calm.
Friday was the 47th record close for the S&P 500 this year. It was the end of a sixth straight week of gains, the longest winning streak since December. Dow Jones Market Data says that the large-cap benchmark index was on track to have its best first ten months of an election year since 1936. It was also on track to go against a well-known seasonal trend by ending October with gains, even though October has historically been the most volatile month in a presidential election year.
The Cboe Volatility Index, also called VIX VIX -1.09% or Wall Street’s “fear gauge,” stayed below 20 even though it rose almost 16% this month. On Wall Street, a number of 20 or more means that things are very volatile.
“For the past two weeks, stocks have mostly ignored what the dollar DXY -0.29% and the bond market were doing.” “The fact that stocks didn’t flinch in the face of those moves suggested complacency,” Jonathan Krinsky, chief market analyst at BTIG, wrote in a Wednesday client note. “Markets are always more interested in the speed of the move [in yields] than the overall level.”
But now, stocks finally seemed to be feeling the stress of the election and rising rates. Krinsky said that there is a “downside risk for stocks broadly” in the coming weeks, even if this week’s drop in stock prices is just the beginning of the “pre-election jitters.”
He also thinks there is a “good chance” that the S&P 500 will drop to between 5,500 and 5,650 in the next few weeks. On Wednesday afternoon, the large-cap benchmark index closed at 5,797.42.
But Aaron Clark, portfolio manager at GW&K Investment Management, told MarketWatch that he doesn’t think there will be a big drop in the stock market or a selloff before Election Day. He says this is because stocks have only responded to the “extreme views of both candidates,” which will probably be tamed closer to the middle once one of them wins.
According to Clark, the markets can’t tell what policies will be followed at this point, and it’s even harder to tell which ones will be put into place. Clark said this over the phone on Wednesday.
Clark said that he thinks the most likely result of this year’s election will be a divided Congress. This should be good for markets and the U.S. economy.
“Congress is split, so it will be hard to pass any major laws that would really change the direction of the economy.” “I don’t think they will be as extreme as what they’ve been saying in their campaign ads so far,” he said. “They might get tax cuts, tariffs, or a change in immigration policy.”
On Thursday morning, U.S. stock futures were all over the place. The S&P 500 futures (ES00 0.22%) were up 0.4% and the Nasdaq 100 futures (NQ00 0.62%) were up 0.8%. However, the Dow futures (YM00 -0.23%) were down 0.1%.
