Wall Street makes trading elections sound like it would be as easy as falling off a log: all you have to do is put your money into the stocks or areas that will do best under the policies of one presidential candidate or the other, and you’ll make money. Reality often seems to let us down.
Green energy stocks did much better than standard energy stocks during both former President Donald Trump and President Joe Biden. This may be the best example of this. It was said on Wall Street that under Trump, fossil fuel stocks would go through the roof and green energy would be left behind. FactSet says that during Trump’s presidency, the S&P 500 energy sector fell almost 40%, while the S&P Global Clean Energy Index rose more than 275%.
With Biden in charge, green energy was sure to keep doing well. Again, wrong. From the start of his term to the middle of October, the S&P 500 energy sector went up 110%, but the clean-energy index went down 57%.
It just goes to show how markets and the economy can easily go against what a candidate says or does in their speeches or policy plans. Matt Orton, chief market analyst at Raymond James Investment Management, made the chart below that shows this very clearly.
This year, there has been a lot of attention on the so-called “Trump trade.” It seems to have caught on, as betting markets show a higher chance of the Republican winner returning to the White House, even though polls across the country and in key states still show the race as too close to call. When it comes to predictions, financial and energy stocks are expected to do well if Trump wins. On the other hand, healthcare, green energy, and technology stocks are expected to do well if the Democratic candidate, Kamala Harris, wins.
The U.S. dollar and Treasury yields have also gone up. This is partly because people are afraid that a Trump administration would make the already huge budget deficit even bigger than a Harris administration, which isn’t supposed to be very thrifty either.
In an interview, Orton said that the basket method seems especially unlikely in the year 2024. The election wasn’t really about policies, he said. “It was more about personalities and really big-picture, high-level ideas.”
Also, Congress is up for grabs, which makes it even harder to just pick a basket of stocks, said Orton. He suggested that investors look to long-term, “bipartisan” buying themes that should be less affected by changes in politics.
Along with the questionable task of predicting how a candidate’s views will manifest in actual policy, there is also the chance that political reality will totally destroy the playbook.
If investors think that a Trump victory will end Biden’s attacks on “greedflation” and price gouging, they should think about how he might respond to a rise in inflation along with historically high corporate profits and profit margins.
A Trump “sweep” is usually thought to be good for the stock market, according to a note from Oct. 16 from Albert Edwards, global strategist at Société Générale. “Investors would be very surprised if, as a political scapegoat, he went after the unusually high profit margins of large and megacap companies.” There must be a give-away!”
Worries about the government budget could also show up in a way that makes other policy-based predictions less important.
In the middle of October, UnitedHealth Group Inc. UNH 0.54% fell hard after Medicare payments were lower than expected. According to a note written at the time by Tom Essaye, founder of Sevens Report Research, this was significant because the Medicare revenue weakness highlighted the fact that the U.S. will have to make some tough fiscal decisions starting in 2025, no matter who is president, due to rising debt and deficits.Businesses that get a lot of their money from the government might have trouble.
Orton at Raymond James says that the basics of the stock market as a whole are sound. He says that stocks will do well no matter who is in the White House in January because of three trends: a rise in military spending around the world, reshoring and building projects, and the development of artificial intelligence.
When it comes to the market as a whole, he says to take the long view and look past any problems caused by the election. For the year so far, the S&P 500 SPX 0.41% is up more than 20%, and it’s only 2.3% below its all-time high set on October 18. The tech-heavy Nasdaq Composite COMP 0.80% has gone up 21.5% so far this year, while the Dow Jones Industrial Average DJIA 0.69% is up 11.6%.
“I think any pullback caused by the election gives the market a chance to buy overall because the results of the election won’t change the strong fundamental base on which the gains we’ve seen this year are based,” Orton said.
