How US election could affect the stock market

The uncertainty of US politics has once again captured global attention, with the investment community closely watching this market-moving event. With President Biden’s decision not to run for re-election, the market is buzzing with speculation about what might come next.

Until this point, Biden’s debate performance had fuelled expectations of a Trump victory in November.

The recent assassination attempt on Trump further accentuated the likelihood of Trump winning, though Biden’s withdrawal has added some uncertainty into the race. The focus is now on who will replace him at the upcoming Democratic convention. According to an Associated Press survey, Vice President Kamala Harris has now secured the support of enough Democratic delegates to become her party’s nominee against Republican Donald Trump. If Harris is elected, she would be the first woman and first person of South Asian descent to be president.

Market impact and election forecast

President Biden doesn’t like to mention the stock market often but it’s worth noting that the S&P500 has risen 17% and Nasdaq-100 an impressive 20%.

The latest polls show Republicans leading the Democrats both nationally and in seven key swing states, presenting a challenging situation for any contender to turn around.

Investors have been hedging bets in anticipation of a possible Republican leadership, leading to some easing in Trump trades while the market waits to see what comes next. If the polls continue to favour Trump, the US election could become a non-event by November.

Global markets tense as central banks signal policy shifts

Central banks worldwide are nearing the end of their tight monetary policies to fight inflation, while the potential results of the US elections continue to affect global markets.

Recent concerns over US President Biden’s health and his announcement to withdraw from the nomination and support Vice President Kamala Harris has caused controversy. Meanwhile, former President Donald Trump leads in the polls following the attack on him.

On the macroeconomic front, this week’s intense data agenda, particularly US growth, suggests that the US Federal Reserve (Fed) might cut interest rates up to three times by year-end.

While the latest data indicates a slowdown in the labour market, the Fed’s easing policy actions could dampen high-risk sentiment across the globe.

On the other hand, the financial results of giant companies such as Alphabet, Tesla, Qualcomm, and IBM are expected to increase stock and sector-based volatility throughout the week.

Additionally, macroeconomic data and comments from ECB officials could change pricing, while analysts say the ECB is almost certain to make at least two interest rate cuts for the rest of the year.

US markets saw declines, with the Nasdaq index down 0.81%, the S&P 500 falling 0.71%, and the Dow Jones decreasing by 0.93%.

In Europe, the FTSE 100 index in the UK fell 0.6%, Italy’s MIB 30 index dropped 0.91%, France’s CAC 40 index decreased 0.69%, and Germany’s DAX 40 index was down 0.1% on Friday.

Mild market reactions to elections

Half the world’s population is heading to the polls in 2024, and the markets have remained resilient so far, despite significant political changes.

Key elections in the UK, India, France, South Africa, Indonesia and Pakistan have had varying impacts in 2024. Despite the heightened attention and drastic increase in media coverage, most of these elections have resulted in mild market impacts.

For example, the UK’s anticipated Labour victory was already priced into the market well before the official results. This led to a moderate market reaction, with the FTSE 250 midcap index rising 1.8% in early trading to its highest level since April 2022. Shares in house-building companies were the big winners on the FTSE 100, up 2.3%, as Labour pledged to speed up home building.

The French election, though tightly contested, had minimal market impact. Initially, the French CAC 40 showed a slight decline, before recovering and climbing as much as 0.9%.

The Indian election was probably the most dramatic.

Although initial results suggested that Narendra Modi would not have the expected landslide victory, he eventually returned to power. The market saw an initial drop of 8%, but then rallied 11% over the next few weeks as Modi consolidated his position.

Trump’s influence and investor sentiment

Attention is now turning to the United States, where the risks will similarly be assessed as Americans head to the polls.

Historically, a shift from a Democrat to a Republican US President has often been viewed as positive for the stock market. However, since 1957, the S&P 500 has grown at an average annual rate of 9.8% under Democratic presidents and 6% under Republicans.

The two major variables in all of this are Trump and his Democratic challenger. Recently, Trump’s comments about imposing tougher trading conditions with China in the chip market rattled tech stocks, hitting the Nasdaq hard.

At the same time, his suggestions of a pro-growth 15% corporate tax (down from 21%) will be viewed favourably by the market decision-makers.

These instances clearly show how Trump’s comments are already influencing investor sentiment.

Earnings and fundamentals to drive markets

As the election rhetoric ramps up, investors will closely watch Trump’s tough talk on China to its potential impact.

Many recall the 2018 trade negotiations when Trump’s tweet about potential 25% tariffs on all Chinese imports caused big swings in US indices, sometimes up to 3% on trading days. The US market, dominated by global companies, is highly sensitive to such political developments due to their substantial global revenues.

Earnings and market fundamentals will have a greater impact than political changes as companies adapt to changing conditions. For instance, Apple is moving parts of its production to India to reduce reliance on China.

Despite his strongman persona, Trump has shown a keen interest in stock market performance. During his previous term, he frequently tweeted about stock market performance, using it as a badge of honour. The Dow Jones industrial average rose 70% during his presidential term.

If Trump comes back into power, expect him to keep a close eye on the markets, using their performance as a political tool. However, despite the usual chaos surrounding American elections, it’s unlikely that the 2024 election will have a big impact on the market.

While there may be some volatility as the campaign heats up, fundamental economic data, Federal Reserve policy decisions and company earnings will likely have a far bigger impact on market performance.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.