What Wins & What Loses In Both Election Outcomes

It's More Nuanced Than You Think

You may have already heard, but there’s a presidential election next week. Leaving the politics of all this aside, I want to take a look at how the financial markets might react to this. The 2024 election could end up being the closest one since Bush/Gore in 2000. That has implications for short-term volatility and what sectors & themes could perform better in the longer-term.

If you look at the prediction markets and models, they’re all showing an incredibly close race with just a few days to go.

The betting markets are giving a higher odds of winning to Trump, but the pollsters indicate that the election is a virtual coin flip. That creates the possibility of some whipsaw reactions once we know the final result. In more typical election cycles, we have a fairly good idea of who’s likely to win and the markets usually front-run the outcome. We may not be experiencing that this time around, but we do see some positioning based on expected themes regardless.

If we look at history, the S&P 500 has a pretty good recent track record in the several quarters following presidential elections (note: returns are from election day through the end of the following year, i.e. about 14 months).

2020 - S&P 500 +41%: Biden was favored to win in the lead-up to the election, but it took several days to get the final result. The S&P 500 moved higher by about 4-5% in the week following the election and continued to rally with few interruptions. The returns here could be skewed somewhat because this coincided with a period of multi-trillion stimulus and 0% interest rates.

2016 - S&P 500 +25%: Never one to handle uncertainty particularly well, the equity futures market famously plunged overnight following the Trump victory because the markets gave it only a small likelihood of happening. Within just a day, the markets realized that Trump offered a pro-business platform built on tax cuts and other incentives. Just like in 2020, the S&P 500 rose steadily for more than a year post-election.

2012 - S&P 500 +29%: Obama was leading Romney in the polling just before election day, but the outcome was still in question. The S&P 500 fell by about 5% in the two weeks following the election, but they reversed course fairly quickly and, again, rose steadily with few interruptions.

The elections before that get a little hairier to interpret because they were heavily influenced by the tech bubble and the financial crisis. Can we get another big double-digit rally in 2024/2025? I wouldn’t go as far to say that it’s likely, but it’s certainly possible. The S&P 500 is already up 37% over just the past year and trades at around 23 times next 12 month’s earnings, so it’s not exactly starting from a place of value. However, both candidates are likely to keep running up huge deficits, the Treasury is going to issue another half trillion dollars of debt in Q4 and the Fed is lowering interest rates. From purely a fiscal and monetary standpoint, liquidity could drive U.S. equities to further gains.

What The Markets Think Right Now

Subjectively, it appears that the markets are pricing in a greater likelihood of a Trump victory.