The election odds seem to be tipping in favor of former President Donald Trump. However, Democratic candidate Kamala Harris remains well within striking distance in what remains a razor-close race. But should stock market investors be afraid of either outcome, or whether there is another contested election?
The answer seems to be no, with experts believing that the Federal Reserve will play a bigger role in the fortunes of the stock market than the election results.
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2024 Election Investing Strategies: How To Prepare Your Portfolio
Nevertheless, investors should be wary of the possibility of turbulence hitting the performance of their stock market portfolios, at least in the short term.
John Longo, distinguished professor of finance and economics at Rutgers Business School, told IBD that there could be wobbles in the lead-up to and the immediate aftermath of the election.
“Historically, there is volatility around the election date, but it is usually short-lived. I expect a similar pattern this year,” he said.
Stock Market Insights From Contested Elections
There have already been recent examples of contested elections, both in 2020 and the 2000 election between George W. Bush and Al Gore.
These cases showed such occurrences can cause a degree of volatility in the stock market until there is a resolution. But it should not be a long-term roadblock for stocks, according to Art Hogan, chief market strategist at B. Riley Wealth.
“In the case of 2000, with the famous hanging chads recount process (a problem that caused some punch-card ballots used at the time not to have registered) and eventual Supreme Court ruling, markets were able to digest the news rapidly and move forward,” he told IBD. “Back in 2020, the resolution of the election seems to be an ongoing issue with some cohort, and yet markets have certainly been able to move significantly higher since then.”
He also noted that elections tend to cause volatility in the two weeks prior to the election itself, “which is exactly where we are now.”
“I suspect this year will be no different, and hope that we get an easily decipherable decision from voters on Nov. 5 so that we can resume what is a normal pattern for markets to rally into the year and after some short-term volatility in the last two weeks of October and the first week of November,” he said.
Which Election Outcome Is Best?
There are a variety of outcomes possible, such as a Democratic sweep, a Republican sweep or various flavors of a split Congress with Trump or Harris leading the executive branch.
According to Longo, the best outcome for investors would be a split scenario — and for very important reasons.
“Investors usually prefer a ‘gridlock’ scenario, where one party does not have a clean sweep, since substantial legislation is less likely to get through and market forces are more likely to determine economic outcomes,” he said.
Research from CFRA shows that the best returns for the benchmark S&P 500 have come when there is a split Congress along with a Democratic president. The worst came from a unified Democratic Congress under a Republican president. In contrast, a Republican president and Congress and a Democratic president along with a Republican Congress provide the next best returns.
Trump Vs. Harris: Who’s Better For The Stock Market?
CFRA Chief Investment Strategist Sam Stovall told IBD that stock market gains since July 31 could reflect a rising confidence among investors that the more business-friendly Trump could be in the driver’s seat heading into the business end of the election season.
“That’s a pretty solid indication that whatever is driving the market, if it is politically motivated, it could be because of the expectation that Trump could get reelected and therefore (result in) more favorable tax policy and less onerous regulations,” he said.
Between the pair, Trump promises less regulations and lower taxes, but his love of tariffs could spark global trade animus as well as cause more inflation. Meanwhile, Harris could be less aggressive in terms of tariffs but solidify the current aggressive stance of the Biden administration on mergers while also pursuing higher taxes.
However, any investor will have to weigh just how likely it is that either candidate will be able to get their agenda through Congress.
“The hard part is what they say versus what they’ll accomplish could be two different things. Should we have a split Congress, which is what we expect to be the most likely outcome, not much of what either candidate wants to do will get done,” Stovall said. “Investors could end up breathing a sigh of relief that we won’t see a lot of tariffs possibly, which could be inflationary if Trump were elected. But then we might not see higher taxes if Harris were elected.”
These Areas Could Benefit From Trump, Harris
Stovall also believes that different parts of the economy could benefit depending on who wins the election.
“If Trump gets elected, then he wants to increase the drilling and production of oil, which would hurt the upstream companies of drilling, exploration and production but could help the refining and marketing side of energy,” he said. “A Trump victory would help the banks, tech and media companies because of the less likely adoption of regulatory pressures against those industries.”
However, he believes that a Harris win would help green energy stocks. These include electric-vehicle plays, solar stocks and wind power companies.
And there is one area that could do well no matter who manages to secure the White House.
“Industrials could do fairly well and end up being immune to whoever gets elected,” Stovall said. “Manufacturing, transportation, basically your cyclical sector, that should do well as the economy continues to expand and as interest rates fall.”
So What Should Stock Market Investors Do Now?
As ever, a one-size-fits-all approach to investing makes little sense. But there are some guidelines to help stock market investors.
“I suggest long-term investors ignore the noise and stick to their long-term plans,” Longo said. “If someone is coming into the market today with a portfolio mostly in cash, I would advise them to wait until there is further clarity on the election results or to dollar cost average into the market in an effort to mitigate the potential volatility.”
Paul Christopher, head of Global Investment Strategy for the Wells Fargo Investment Institute, believes investors should be continuing to rebalance their allocations.
“Focus for now on the economy’s likely reacceleration and lower interest rates in 2025,” he said. “There will be time to account for policy changes from Washington, but after the new Congress and president start work in January, and probably even later,” he said.
Christopher said their “strong preference” is for investors to continue moving money out of money markets and other short-term fixed-income instruments in favor of large- and small-cap U.S. equities.
Please follow Michael Larkin on X at @IBD_MLarkin for more analysis of growth stocks.
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