Biden-Trump rematch: What it means for the US stock market

New York - Elections in Mexico, India and Europe have set off upheavals in global stock markets in 2024. In the United States, investors contending with uncertainty related to inflation, interest rates and geopolitics are already bracing themselves for volatility that could accompany the presidential campaign and November election.

But while markets tend to hate uncertainty, and volatility can raise risks, history and other factors suggest it is by no means certain that even a nail-bitingly close contest will be bad for equities.

The two candidates – President Joe Biden and presumptive Republican nominee Donald Trump – will face off in this cycle’s first presidential debate on June 27.

What data about election years shows

Election years have generally been good for the US stock market. The S&P 500 Index has risen in almost every election year since 1960. The exceptions were 2000 and 2008, which were marred by the dot.com bust and the great financial crisis, respectively. The record looks even better for recent cycles. In the three election years since 2008 – 2012, 2016, 2020 – the benchmark index rose at least 10 per cent.

Possibility of contested or close election result

Market pundits have already started to warn that this election may remain too close to call until the very last minute, and there are chances – albeit small – that a decision may not be clear days after the vote itself. They point to the possibility of a contested or close election result as well as the ongoing adoption of vote by mail, where counting takes longer than machine votes.

During the 2000 election recount battle in Florida, the S&P 500 lost more than 4 per cent, yields on 10-year Treasury notes fell 52 basis points and gold prices jumped as investors piled into haven assets.

The possibility that the election may end in a protracted dispute or, worse, political violence, is one that investors are grappling with as well. Markets are expected to struggle if such a situation arises, especially if it also means uncertainty over the final result.

What the ‘fear index’ is saying

The futures curve of the Chicago Board Options Exchange Volatility Index (VIX), also referred to as the Wall Street’s “fear index”, shows that in 2024, traders have already started to prepare for the risk of stock market swings around the November vote, a position that is usually seen a little later in the year.

Meanwhile, Goldman Sachs has advised that clients who believe an election winner won’t be decided for more than 15 days, should consider owning November VIX contracts, which represent implied volatility through to the middle of December.

That said, strategists at Bank of America have noted that an index gauging policy uncertainty and the VIX itself are at lows, suggesting the market is yet to fully price in a potential rise in political uncertainty into the election.

Issues for investors to zero in on

Tax, trade and immigration are key issues that investors will be watching closely.

Trump has promised to lower the corporate tax rate to 20 per cent from the current rate of 21 per cent, according to people familiar with remarks he has made. He has also vowed to make permanent the Republicans’ sweeping 2017 tax law and urged renewal of key portions of the Bill.

Separately, reports suggest that the Democrats are working on plans that will raise taxes on corporations and the rich.

Trade and tariffs have already been in the headlines. Trump has talked about a 10 per cent across-the-board tariff, and steeper levies on Chinese-made goods. Mr Biden has unveiled sweeping tariff hikes on a range of Chinese imports, including semiconductors, batteries, solar cells, critical minerals, steel, aluminium and electric vehicles.

Trump has said that he will simply deport undocumented immigrants. Mr Biden has shuttered the US-Mexico border to some asylum claims until the level of crossings there fall substantially. JPMorgan has said that any effective efforts to restrict immigration could be a potential driver of inflation if it creates significant labour shortfalls, thereby curbing growth.

Equity sectors a Biden win would hit or help

Mr Biden’s positive stance on clean energy would mean that his re-election would be good news for that entire group, including makers of electric vehicles (EVs) and EV charging network operators such as ChargePoint Holdings, Beam Global and Blink Charging, as well as suppliers and battery makers.

Solar stocks are expected to do better under Mr Biden as well, among them First Solar, Sunrun and Enphase Energy.

Financials may face continued risk, given that the Biden administration is expected to stay tight on regulations, with higher capital requirements for banks such as Bank of America, JPMorgan Chase and Goldman Sachs Group, and continued pressure on credit-card fee income.

Drugmakers may also face regulatory pressure as the current administration’s Inflation Reduction Act has pushed for reduction in drug prices.

Equity sectors a Trump win would hit or help

Companies with high revenue exposure to China can face disruption if trade tensions escalate with a Trump win. Some prominent names include chipmakers such as Nvidia, Broadcom and Qualcomm, materials companies such as Air Products and Chemicals and Celanese Corp, autos such as Tesla, and industrials like Otis Worldwide.

Clean energy and the EV complex that have benefitted and will continue to get a boost from Mr Biden’s Inflation Reduction Act are expected to face challenges, given that Trump has said he will entirely reverse Mr Biden’s EV policy. If Trump were to roll back tax credits extended to buyers of EV vehicles, companies at risk will include Tesla, Rivian Automotive and Lucid Group, as well as battery makers and parts suppliers.

Companies in the oil, natural gas and traditional energy industry will likely benefit from the pro-oil policies in a Trump victory, given his vow to roll back restrictions on domestic oil production. Stocks to watch include Baker Hughes, Exxon Mobil, ConocoPhillips, Occidental Petroleum and Williams Cos, Halliburton, Devon Energy and Chevron.

Defence stocks are expected to do better under a Republican win, given expectations that defence spending will be a clear priority for the party. Stocks to watch include Lockheed Martin, Northrop Grumman and RTX Corp.

Cryptocurrency stocks can also benefit under Trump, as the former president has increasingly highlighted Bitcoin and other digital assets on the campaign trail in recent weeks as a way to reach new voters. Stocks to watch include Coinbase Global, Marathon Digital Holdings, Riot Platforms, Cleanspark, MicroStrategy and Cipher Mining. BLOOMBERG