As election day progresses and ballot counting takes center stage, Wall Street is keeping a close eye on key swing states in the U.S. The market is anticipated to experience fluctuations amid uncertainty until a definitive outcome emerges, as highlighted by market analysts. The benchmark Standard & Poor's 500, which has seen a 20% increase so far this year, showed a slight uptick early Tuesday, echoing modest gains in the tech-heavy Nasdaq and the influential Dow Jones Industrial Average.
Vice President Kamala Harris, the Democratic nominee, currently holds a narrow lead over former President Donald Trump, the Republican contender, based on the RealClearPolitics national poll average. Pricing strategies related to investments in the U.S. presidential election depend significantly on a few thousand voters in pivotal swing states.
According to insights from the Wells Fargo Investment Institute, these states, including Arizona, Georgia, Michigan, Nevada, North Carolina, Pennsylvania, and Wisconsin, are crucial to determining the election's outcome. Following a surprising poll indicating support for Harris, RBC Capital Markets has also included Iowa as a critical state to monitor. Market participants may face several days of uncertainty before the final votes are counted.
Scenarios may involve division between control of the White House and Congress, or unified governance under a single party. RBC analysts observe, "One of our core beliefs about elections and the U.S. equity market is that the latter must endure some temporary repricings around this event every few years, but that these dislocations tend to be temporary in nature." Historical data suggests that the S&P 500 often experiences growth, regardless of which party holds power in Washington. Should Harris secure the presidency amidst a divided Congress, Morgan Stanley analysts anticipate strength in tariff-sensitive consumer stocks and renewable energy sectors in the short term.
Conversely, if Trump wins under similar conditions, the initial market response may favor strong cyclical stocks, though leadership dynamics could rapidly evolve post-election results. Furthermore, the potential for a protracted delay between voting and resolving the election outcome poses another concern for investors.
RBC notes that apprehension arises from the possibility of a contested election, reminiscent of the 2000 event, which saw the S&P 500 tumble nearly 12% from election day to its December low. This instability stemmed from the narrow competition between George W. Bush and Al Gore, creating disputes over ballot recounts concluded by a Supreme Court decision.
In the 2020 election, certainty over Joe Biden's victory didn't materialize until days after the polls closed. Douglas Beath, global investment strategist at Wells Fargo Investment Institute, remarks, "Financial market volatility can accompany delays after Election Day but typically subsides as the economy rapidly reasserts its influence as the primary driver of anticipated earnings." While a drawn-out election outcome remains plausible, analysts project no lasting detrimental effects on stock prices beyond a brief episode of volatility. In light of an upcoming Federal Reserve interest rate decision, projected to encompass a 25 basis-point cut, analysts predict a shift in investor focus following the election results.
Beath contends, "The rate cut we anticipate from policymakers should redirect investors toward what truly influences markets: the near-term interest rate trajectory and the economic outlook into 2025.".