Which presidential candidate will win the election? Most polls show a close race between Vice President Kamala Harris and former President Donald Trump, with just three days to go until Election Day. In such a close contest, victory could be determined by a small number of votes in one or more swing states.
I will not try to predict whether Harris or Trump will prevail. However, I have more confidence in predicting what will happen to the stock market if Harris wins.
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Image source: Official White House photo by Lawrence Jackson.
I predict the S&P500(SNPINDEX: ^GSPC) will rise if Harris is declared the winner in the presidential race. But I also think stocks will rise if Trump wins. Why? I expect a relief rally either way.
If there’s one thing investors hate, it’s uncertainty. A lack of clarity about the future makes decisions about where to invest more difficult. Uncertainty can often serve as an anchor in the stock market. However, when uncertainty is removed, the anchor disappears, allowing stocks to gain.
Due to the intense presidential race and the significantly different policies of the two leading presidential candidates, investors are currently facing a lot of uncertainty. I’m not sure the uncertainty will disappear immediately after Tuesday’s election. We may not know who the winner is until days or even weeks later. However, knowing this, the stock market is likely to respond positively to the removal of uncertainty.
However, I don’t expect a relief rally to last very long. Once the collective exhalation of investors is over, other factors will weigh more heavily – specifically which policies proposed by the winning candidate are likely to be implemented.
Let’s assume Harris beats Trump. How will stocks perform after the initial relief rally is over? I think it depends on which party controls Congress.
Some stocks should rise if Harris wins and her fellow Democrats gain majorities in the Senate and House of Representatives. For example, the vice president’s housing proposals would be more likely to be implemented once the election takes place. I predict top home builders DR. Horton, LennarAnd NVR would be very popular with investors.
Democrats have a steep hill to climb if they want to keep the Senate. They are defending all but three of the fifteen seats in the Senate. Decision Desk HQ predicts that Republicans have a 71% chance of winning the Senate.
I predict that the current bull market in the S&P 500 will gain new momentum with Harris as president and the Republican Party controlling at least one chamber of Congress. Historically, stocks have performed best when there has been a divided government with a Democratic president.
This environment could offer investors the best of both worlds. If Harris beats Trump, it would mean the former president’s high tariffs won’t be implemented, causing inflation to make an ugly comeback. Republicans who control the Senate and/or House of Representatives would likely doom Harris’ plans to raise corporate tax rates. The only legislation that would pass would be bills that could guarantee bipartisan support.
While I admit I could be completely wrong, I’m relatively confident in my prediction of a relief rally followed by a continued bull market with a Harris victory. That said, some “known unknowns” could cause my prediction to fall flat on its face.
A major geopolitical crisis could cause the S&P 500 to plummet. For example, an outright war between Israel and Iran would almost certainly be bad for stocks. Another pandemic would likely cause the stock market to sink. Unexpected interest rate increases by the Federal Reserve can cause problems.
Things can happen that derail any prediction, regardless of its value. However, these “known unknowns” would likely cause headaches for investors if Trump also wins a second term.
The good news: Investors will soon be able to cross one big known unknown — who will be the next president — off the list.
Consider the following before purchasing shares in the S&P 500 Index:
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Keith Speights has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in DR Horton, Lennar, and NVR. The Motley Fool has a disclosure policy.
Prediction: Here’s What Will Happen to the Stock Market If Kamala Harris Wins, originally published by The Motley Fool
