Weekly Update: How the Election Will Affect Stocks
Good evening, and welcome to this week’s edition of Stealth Trades!
Tuesday is election day.
The non-stop media barrage of campaign ads and automated texts asking for contributions will finally come to an end… at least for now.
Given the stark contrast between the candidates, many have asked how the result will affect the stock market. Here are my thoughts…
First, know that the market is a discounting mechanism. All known information is already priced in – so are the assumptions about what will happen next.
Markets move in anticipation of news, not in reaction to it.
Why do you think interest rates fell 1.5% in the months before the Fed finally cut? Investors were “pricing in” the pending cuts.
The same is true with stocks. Market participants have priced in a Trump victory. Sectors that will benefit from his administration have been rising, and those that will be hindered have gone down.
PAVE is the infrastructure ETF. This sector is expected to benefit from a Republican victory, and as such, has risen steadily over the last two months.
Clean energy, on the other hand, is not going to get any favors from the “Drill baby drill” president.
The market knows this, and is pricing that into the clean energy ETF, ICLN:
What causes large moves in the stock market, both up and down, are when these assumptions turn out to be wrong.
If a company reports earnings in-line with expectations, the reaction in the stock’s price will be minimal – even if those earnings are double or triple what they were a year prior.
When you see a large gap the following day, it is because the company reported sales and profits significantly above or below expectations.
This idea is the same whether we are talking about an earnings report, jobs number, inflation report, or any other economic indicator.
Going into November 5, the market expects a Trump victory. If that happens, I do not expect to see much of a reaction in the indexes.
A Kamala win, however, would be unexpected. Wall Street would frantically adjust their models and re-price what they believe to be the fair value of hundreds of stocks. The result would be extreme volatility for at least a week.
And make no mistake, Wall Street wants Trump in the oval. There is no question that his policies would deliver more benefit for equity markets. He is a pro-jobs president who wants to lower taxes – both personal and corporate, cut regulations, open up energy markets, and cut the wasteful federal spending that caused this record inflation (albeit with Elon Musk’s help).
That is not to say that some areas of the market would not do better under a Kamala presidency.
Clean energy stocks, which we mentioned earlier, would surge if she wins on Tuesday. Other sectors that receive heavy government funding would also trade higher. For the market as a whole, however, I would expect to see an initial negative reaction if Harris wins.
At the end of the day, the United States economy will likely thrive for decades to come. We have had some very good presidents over the years and some very poor ones. But markets have continued to march higher.
Many thought stocks would crash if Trump won. And while they did sell off in the first hour after he won, they came ripping back to record highs until COVID hit.
And take the longest bull market ever which took place from 2009 through 2020. Most of that transpired under a Democrat president. I don’t think he did any favors for corporate America, but investors fared just fine during his terms.
I am heavily long the stock market and will remain so through next week. I suggest you do the same.
Best wishes for your trading,
