Stock Market Implications Ahead of the Election

John Quinlan, Contrbutor

The upcoming Presidential Election comes with many uncertainties for the future, including its impact on the stock market. Each candidate’s economic policies undoubtedly will determine the direction of the market in their own respective ways.

According to a recent survey from Hartford Funds, 93% of investors believe that the presidential race will affect the stock market and 84% said that it will impact their investment decisions. So exactly what would result from a Trump or Biden victory in terms of the stock market?

Joe Biden’s proposed tax plan includes an increase on the corporate tax rate from 21% to 28%. With a Biden victory, it is expected that investors would engage in a short-term selloff in anticipation of a market dip and stagnation. 

Clean energy, healthcare services, infrastructure stocks would be set to do well with a Biden win. Under the Democratic plan for the Green New Deal, these three industries would experience an increase in business.

The market has reacted favorably to the Trump administration’s tax policies.Up until the COVID-19 outbreak, the Dow Jones Industrial Index closed at a record high in February. The economy has shown to rally but many are weary of what will come of the election.

Although most industries would react favorably to a Trump re-election, the fossil fuel industry would gain the most confidence. It is undeniable that this election will determine the future of energy in the US, and fossil fuel companies would thrive under a Trump second term.

Another aspect of the economy that is contingent on the election is the United States’ relationship with China. Chinese companies would favor a Biden presidency, and a Trump re-election would continue tension between the two nations and affect companies businesses in both. 

An interesting fact to note is that while the market does not tend to react as much to Congressional election results, the market reacts better to a divided Congress because it indicates a more status quo future, something the market prefers. 

In the past, the market favored a Republican congress during Clinton’s and Obama’s presidencies. This means that we could see a stable market with a red and Biden victory or a blue and Trump victory. 

The stock market can be a good predictor of presidential election outcome.

I don’t think this market is very compelling, and I am pulling back and waiting to see what happens.

— Jim Cramer

The Socionomic Institute, a research group that uses stock market data to predict elections and economic trends found that an incumbent president president was up for reelection and the stock market was up more than 20% in the preceding years 16 times, and 14 of those times the incumbent won reelection.

If this trend is right, it predicts that Trump will win reelection this November, but this data is not a sure thing. The Socionomic researchers discovered that the market is more reliable in predicting election results when the market increases over a variety of sectors, and not concentrated in a single industry. Right now, the tech sector is far outpacing the overall market. The last time this formula did not predict reelection was with George H.W. Bush, when the broad market was down 11% in the prior three years of his presidency.

Many look to the stock market in predicting the election outcome, but only 52% of American families are invested in the market. The stock market is not always the best indicator of overall economic health either. Jim Cramer believes that the stock market does not reflect American’s need for another stimulus bill. 

Although the market has rallied from pandemic lows in the spring, it will begin to reflect the very cash poor economy. With Congress postponing stimulus bill talks until after the election, Cramer says “I don’t think this market is very compelling, and I am pulling back and waiting to see what happens.”

It can be easy to worry about your investments heading into the election, but it is important to not become an emotional investor and remain patient. While either outcome may have an affect on the market, your holdings are likely safe in the long term.