The upcoming U.S. Presidential election in November is set to be a rematch between Biden and Trump.
Polls indicate that the two candidates are nearly neck-and-neck, and the House and Senate standings are similar.
This week, we’ll explore the implications of the U.S. election, its potential impact on the stock market, and how you can strategically adjust your portfolio in anticipation of the event.
What Happened in Markets this Week?
Here’s a brief overview of the key developments:
PDD Holdings, the operator of Temu, reports a 123% surge in revenue (Reuters)
Temu’s impressive sales growth can be attributed to an extensive advertising campaign, which included a whopping four $7 million Super Bowl ads. The company reportedly spent $2 billion on advertising across Meta’s platforms last year, making it their largest advertiser. In 2023, Temu also emerged as one of Alphabet’s significant clients. It’s insightful to track where the money flows and identify who stands to gain when companies post such significant numbers.
Elon Musk’s xAI has open-sourced the GROK AI model (Reuters)
This development is part of the ongoing rivalry between Musk and OpenAI. As the pool of open-source models expands, the perceived value of proprietary models may diminish. However, this is okay for companies like Microsoft or Alphabet, as their models will be integrated with cloud computing capabilities and their comprehensive services.
Apple is in talks with Alphabet to integrate Gemini into iPhones (Business Insider)
Apple currently generates around $20 billion annually from making Google its default search engine, making this collaboration a logical progression. Some analysts suggest this plan underscores Apple’s lag in A.I., which may hold some truth. Nonetheless, Apple may acknowledge that Google possesses more resources for developing A.I. models, allowing Apple to concentrate on applications and hardware. While Apple is working on its own large language model (LLM), partnering with Google will enable it to succeed in the A.I. realm without solely depending on that model’s success.
A US Lawsuit Accused Apple of Creating a Monopoly (NYT)
The US Justice Department mainly seeks to prevent Apple from blocking apps that interact with its devices, including iPhones, watches, messaging apps, digital wallets, and other technologies. If the lawsuit succeeds, it could dismantle the “walled garden” that defines Apple’s ecosystem, paving the way for a more open environment where third-party software and hardware can integrate more seamlessly. Given that this exclusivity currently serves as a competitive advantage for Apple, the company is likely to mount a strong defense, just as it has in numerous similar legal battles over the years.
The Biden vs. Trump Rematch
This market cycle has been atypical in several respects, and this election year is shaping up to be unusual from a market perspective.
Historically, election years tend to favor the stock market, with gains typically emerging in the latter half of the year. The S&P 500 has already risen by 9.5% year-to-date, which is nearly on par with average full-year returns. Interestingly, the tech sector, usually the weakest performer during election years, is leading the charge in 2024.
The past two elections have triggered some market volatility, and with 2024 being another contentious election, it’s understandable that investor anxiety is on the rise.
✨ We can expect to see some volatility and sector rotation in the months leading up to and following the election. However, looking at more extended time frames, historical trends indicate that the stock market’s overall performance is largely unaffected by who occupies the White House or their party affiliation.
The chart below from Fisher Investments illustrates that the S&P 500 has tended to rise during the majority of presidencies, regardless of the individual or political party in power.
S&P 500 by Party and President – Fisher Investments
An even more revealing chart from Invesco demonstrates how returns would have been affected if an investor had stayed in cash while either party occupied the White House.
✨ The principle of “Time in the market beats timing the market” generally holds true, irrespective of political factors or other considerations. Missing the best days in the market tends to be significantly more detrimental than avoiding the worst days.
Growth of $10,000 in the Dow Jones Industrial Average since 1896 – Invesco
Gridlock for the Win
One key element of the U.S. election that significantly influences stock market returns is the relationship between Congress and the White House—specifically, whether they are controlled by the same party or divided.
In fact, elections for Senate and House of Representatives members may hold more weight than the Presidential race itself.
When either the Senate or House of Representatives is governed by a party different from that of the President, the pace of legislative activity tends to slow down.
Markets tend to favor certainty, and reducing new legislation can create a more predictable environment for investors.
Annual S&P 500 Performance by Congress and White House Control – Fidelity
The competition for control of the White House, Senate, and House is highly contested.
This scenario presents the potential for either a complete sweep by one party or a divided control, both of which could result in significantly different outcomes for governance and the market.
So far, the upcoming U.S. Presidential election in November will likely be a rematch between Biden and Trump.
What’s on the Horizon for 2024?
The influence of presidents on the economy and financial markets might be less significant than they believe. However, there are always certain factors that can impact specific industries and even influence other nations.
With President Biden currently in office, a victory for him would likely indicate a continuation of existing policies, whereas a win for Trump could introduce significant changes. Here are some critical topics that may affect publicly traded companies:
Tax Policy
The Trump Administration enacted several tax reductions in 2017. While some of these cuts are permanent, others will expire by the end of 2025. President Biden has indicated a desire to increase corporate taxes while extending certain income tax cuts. Conversely, Republicans, including Trump, are contemplating further tax reductions. Both parties would require control over the White House and Congress to implement their proposed tax policies, making substantial changes unlikely without a decisive victory.
Energy Sector
It’s well-known that the Republican Party, along with Trump, supports fossil fuels, whereas Democrats aim to accelerate the transition to renewable energy. Thus, the energy sector’s sentiment is likely to fluctuate as polls shift leading up to the election. This dynamic could present opportunities, as both fossil fuel and renewable energy producers will play critical roles in the coming decades.
Deregulation
The Republican Party is also an advocate for deregulation, especially in the financial sector. Significant policy changes in this area would again depend on the Republicans achieving a complete sweep in the elections.
Trade and Foreign Relations
Trump’s victory in 2016 marked a notable pivot away from globalization. He has reiterated his intentions to raise tariffs on imports from countries like China and Mexico. These new tariffs and modifications to trade policies could lead to inflationary pressures in the U.S., while potentially exerting an even more pronounced impact on foreign markets. In the short term, a Trump win might dampen sentiment towards emerging markets, as well as to some extent for China and Mexico.
Although political gridlock often benefits the markets, it could hinder the U.S. in addressing global challenges, such as ongoing conflicts in Europe and the Middle East.
The Insight: Stick to the Process, Avoid Knee-Jerk Reactions
Goldman Sachs recently released a list of stocks they believe could benefit from a Trump presidency. This list includes Chevron Corp, Exxon Mobil Corp, Wells Fargo & Co, JPMorgan Chase, Peabody Energy Corp (coal), Axon Enterprise (which produces law enforcement equipment), and Fluor Corp (involved in border wall construction).
These stocks fluctuate with polling data and would likely see a positive response in the event of a Trump victory. However, stocks often trade on sentiment alone during significant events like elections, leading to potentially unrealistic valuations.
Volatility is expected to increase in the year’s second half as the election season heats up.
Regardless of political outcomes, history indicates that investors who concentrate on identifying high-quality businesses and paying a fair price for them tend to perform well in the long term.
