One of the most hyped market-moving events of the year has arrived.
Americans went to the polls on Tuesday to vote in the presidential election between Donald Trump and Kamala Harris. The outcome could have an impact on financial markets for the rest of the year and beyond.
For the broader market, Wall Street strategists say the biggest risk would be a contentious election, with the outcome not clear for weeks.
“A close, contentious election is the top tail risk we see for U.S. stocks in the coming days and months, although we also suspect that a Democratic move could catch U.S. stock investors off guard as well,” RBC Capital Markets Lori Calvasina wrote in a note. on Tuesday mornings with customers.
As for Calvasina, market strategists have discussed the possible termination of a so-called Trump trade if the former president does not win on Tuesday evening. Over the past month, as betting market odds have shifted in Trump’s favor, certain industries have come to believe that the former president would improve those companies’ prospects if elected. For example: financial services and cryptocurrencies.
When a new poll showed Kamala Harris leading Trump in Iowa on Friday, some of those trades began to reverse. Bitcoin had hit a recent high of $71,000 per coin before briefly falling below 67,000 after the poll was released. Similarly, the financial sector (XLF) was the second-worst performing sector on Monday, having topped the 11 sectors in October, possibly on the belief that Trump’s policies would be more beneficial to banks.
Conversely, strategists have pointed to other trades that underperformed last month and could outperform if Harris wins. In a letter to clients on Sunday evening, Morgan Stanley Chief Investment Officer Mike Wilson wrote that consumer goods companies, which could hurt Trump’s tariff policies, have priced in the potential negative impact leading up to the election.
“We see tariff-exposed consumer stocks and renewables to outperform in the near term,” Wilson wrote of a Harris-win scenario in which Congress ends up in a red-blue split. “The financial, industrial and commodity-sensitive sectors could initially underperform.”
Wilson added that a split Congress could limit the duration of any of the steps.
“In our view, market leadership in the divided congressional outcomes will likely come down to the business cycle, the Fed’s response function, and sector-specific post-election fundamentals,” Wilson wrote.
There has been plenty of debate about what has driven the stock markets over the past month. Investors have digested positive third-quarter earnings results, the start of the Federal Reserve’s easing cycle and a series of releases showing that the US economy is still growing strongly.
At a high level, Trump’s policies are seen as more inflationary than Harris’s. This would likely lead to higher interest rates and is one of the factors that strategists have attributed to the rise in 10-year Treasury yields (^TNX) over the past six weeks.
Wilson wrote that even if a Trump victory were to push yields higher, stock markets could continue to follow the rise in interest rates as long as the move is accompanied by continued expectations of stronger economic growth.
Still, Citi equity strategist Scott Chronert emphasized in a note that parts of the market like Homebuilders (XHB), which have lagged the broader market amid the recent rise in interest rates, would likely benefit from a Harris win.
“On Trump, higher interest rates are seen as relatively negative given the financing angle for most home purchases, both new and existing homes,” Chronert said of the homebuilder sector. “As far as Harris is concerned, some of her policies would provide direct support to first-time homebuyers. Even if inflationary, that should benefit companies in the sector.”
On the more speculative side of the markets, Trump Media & Technology Group (DJT) stock will continue to attract attention, especially as it could cost Trump billions if the stock were to plummet after an election loss.
DJT had been doing well over the past month before sliding late last week as the election seemed close in the polls. Shares rose more than 13% in early trading on Tuesday.
“It’s a binary bet on the election,” Matthew Tuttle, CEO of investment fund Tuttle Capital Management, recently told Yahoo Finance’s Catalysts. Tuttle, who is short the stock, thinks it could drop to $0 if Trump loses.
Josh Schafer is a reporter for Yahoo Finance. Follow him on X @_joshschafer.
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