Our View of America’s Election and Markets

Note: MarketMinder is non-partisan. We prefer no party nor any candidate and assess events for their economic and market impact only. Stocks are party-blind, rendering partisan bias a major investing pitfall.

The results are in! Mostly. With a few states still counting, Donald Trump has passed 270 electoral votes, confirming him as America’s 47^th president and the new Grover Cleveland. Congressional counting continues, but with the GOP picking up three seats thus far, he will have at least a small Senate majority. The House could go either way, but it probably remains Republican with a similarly thin margin to the present, leaving little room for major legislation to pass—as has been the case over the last two years. Stay tuned as this crystalizes for our assessment of how politics likely affects markets next year. For now, we think the chief factor for markets is this: Uncertainty is already falling, a tailwind we expect to propel stocks through yearend.

This phenomenon, regular and consistent surrounding presidential elections, has nothing to do with the winner’s personality or party. It is a simple effect of voters’ standard election processing. Markets are party-blind, with no preference for Democrats, Republicans or any candidate. They care about policies, not personalities, and whether legislative risk is higher than expected. Falling uncertainty on this front has aided bull markets under both parties, while sweeping new legislation has contributed to bear markets under both. But investors aren’t neutral, which tees up certain sentiment patterns.

Something like 40% of the country leans Democratic and 40% Republican. Both sides fear the economic and market consequences if the other side’s candidate wins, believing their agenda will be a net negative. We saw this in spades this time around, with Republican-leaning investors fearing Vice President Kamala Harris’s tax agenda and Democratic-leaning investors nervous over Trump’s tariffs and the prospect of higher deficits. So when it became clear overnight Trump would win, it was immediate falling uncertainty for the 40% of Americans preferring him. The clear result and apparent popular vote victory likely delivered this sooner than many anticipated, perhaps adding to relief.

But worry extends for many of the 40% preferring Vice President Kamala Harris. For them, uncertainty should fade as House and Senate results solidify and Trump selects his cabinet. As the new administration and Congress shape up, it should become clear he won’t be able to accomplish as much as his supporters hope and others fear. The reality that the president can accomplish very little on his own should sink in gradually, and perhaps subconsciously, helping lift sentiment and stocks as 2024 winds down.

As we write, stocks are jumping. A nice daily return is always enjoyable, but we wouldn’t read into this. The initial reaction could very well be ahead of itself, as post-election returns tend to moderate. Since 1925, when the election doesn’t occur during a pre-existing bear market, the S&P 500’s average price return between the election and yearend is 3.6%.^[i] Averages blend extremes and aren’t predictive, so 3.6% is neither a target nor a ceiling, but keeping measured expectations is wise, always.

The same wisdom applies to sector and country trends. Short-term reactions don’t foretell what will persist over the coming months and year. Consider 2016: Many thought Trump’s combination of America-first rhetoric and tariffs would favor US stocks over non-US. Yet eurozone and non-US stocks outperformed US stocks from his election through 2017’s close.^[ii] We aren’t saying a repeat is coming—just that it is an error to extrapolate from rhetoric to market reality.

Congressional results are another opportunity for falling uncertainty. The Senate will change hands. Not by much, but we don’t know the final margin yet. So far, Republicans picked up Montana, Ohio and West Virginia. With very little split-ticket voting, there is a good chance they take Nevada and Pennsylvania, though Arizona is likely to remain Democratic. A 54 – 46 Republican majority is a realistic possibility (presuming the independents in Maine and Vermont continue caucusing with the Democrats). This would be bigger than the Democrats had under Biden and slightly increased from Trump’s majority in 2017, but it isn’t a huge margin, and the degree of intraparty gridlock isn’t yet clear.

Meanwhile, the House isn’t swinging hard either direction. Republicans are closer to a majority for now, but neither side has net gains as we write. Given the close margins in the still-undecided seats, recounts and runoffs are virtually assured. The chamber could go either way, but the majority will probably be narrow. If we get slim Republican edges in both chambers, it wouldn’t technically constitute gridlock. But narrow majorities are the next closest thing to it, as internal dissent can kill major bills. Regardless, as clarity gradually arrives, it should contribute to markets’ continued relief.

Given the Congressional question marks, all the talk of what a Trump presidency and Trump policies mean for markets is premature. His campaign chatter sets expectations, with big hopes on one side and fears on the other. There are fears of sweeping tariffs and hopes for tax cuts. But most of this hinges on Congress, which is an unknown while the House remains undecided. We can’t know now which provisions of 2017’s Tax Cuts and Jobs Act will get extended, whether tax rates will fall further, and whether the higher state and local tax (SALT) deduction will return. We do know, however, that tax changes have no preset market impact.

As for tariffs, it is premature to presume Trump’s proposed blanket 10% levy on all imports will become reality. While trade law grants the president authority to enact some tariffs unilaterally on national security and other similar grounds, the provision is narrow. It is difficult to see justification for tariffs on Germany or Australia under national security or currency manipulation grounds, for example. Presuming courts would block an attempt to apply targeted tariffs to tens of thousands of individual goods, a new, blanket tariff would likely require Congress, rendering it uncertain. Regardless, these are two areas where investors will likely welcome clarity as it gradually arrives.

While stocks greeted Trump’s win warmly, bond markets seemed less pleased. 10-year US Treasury yields surged, underscoring the common view that a Trump presidency will come with higher debt and inflation. Here, too, we wouldn’t read much into it. Bond markets, while less volatile than stocks overall, aren’t immune to sentiment swings. As the dust settles, we think pre-existing trends likely continue.

Since the Fed cut rates in September, long rates have risen, to little notice. Not necessarily because of politics, but likely because of the common view that rate cuts are stimulus and, all else equal, bring faster growth and more inflation. If markets view Trump’s win as positive for the economy, these trends probably continue—good for stocks, but not consistent with falling long rates. That said, it is likely a mistake to get carried away and extrapolate this into much higher long rates.

Again, where stocks go in 2025 will depend on a host of factors, including the degree of gridlock—not to mention traditional economic and sentiment drivers. Bonds, too, will depend on more than politics. The multitude of factors affecting returns aren’t yet in focus, so stay tuned for our thoughts on next year. But it is premature to weigh that today.

In the meantime, we see stocks rising through yearend at least as Congress and the cabinet take shape and uncertainty keeps falling. Volatility is always possible, for any or no reason, but overall, we think most drivers point positively now.