A significant pair of potentially market-shifting occasions is set to unfold next week as Americans cast their ballots for the next president and the Federal Reserve provides further clarity on the trajectory of interest rates during its monetary policy meeting.
The Nov. 5 election marks the conclusion of a campaign period that has captivated the nation and created fluctuations in various sectors of the financial markets. This includes the rise and fall of the so-called Trump trade, a series of asset price movements reflecting the sentiment that Republican Donald Trump is building momentum against Democrat Kamala Harris in the presidential race.
These trades have manifested in an appreciation of the U.S. dollar and a decline in Treasuries, which may be driven by robust economic indicators and a bitcoin surge fueled by optimism that Trump would loosen regulations on the crypto sector.
Nevertheless, polls are still tight, and the odds leaning in Trump’s favor were decreasing towards the week’s end. Some investors anticipate volatility linked to next week’s election, regardless of the outcome.
“In either outcome, it appears there are some immediate risks,” stated Walter Todd, chief investment officer at Greenwood Capital.
Todd mentioned that a Republican victory could trigger a “sell the news” scenario that prompts profit-taking in Trump-oriented trades. Conversely, a Harris win might lead to a more pronounced unwind, he noted.
The control of Congress will also be finalized with Tuesday’s vote, adding another layer for investors to consider as they evaluate how different political results could influence assets in the long run, especially since the two candidates represent sharply contrasting approaches for the U.S. economy.
For instance, the belief that Trump would aim to reduce regulations could benefit banking entities, while increased tariffs might favor small-cap companies with a domestic focus, thereby elevating the potential for broader market volatility.
Analysts suggested that expectations for Harris to endorse clean energy initiatives could result in an uptick for solar and other renewable energy stocks if she comes out on top.
Investors are also cautious about volatility resulting from an election outcome that is not immediately apparent due to the tightness of the race or challenges posed by one of the parties. In 2020, Trump attempted to contest the results of his defeat to President Joe Biden, incorrectly claiming widespread voter fraud in several states.
“The market fared well under Trump and can continue to do so under Harris,” remarked Robert Pavlik, senior portfolio manager at Dakota Wealth. “What we need is clarity.”
The Fed’s decision on monetary policy this Thursday presents another risk to the S&P 500, which has seen a rally of about 20% this year, even as mixed earnings from several major tech companies this week caused the index to finish October down, ending a streak of five consecutive months of gains.
Market predictions for Fed funds futures indicate that traders are anticipating a modest 25 basis point cut to the U.S. central bank’s benchmark policy rate, according to LSEG data, following a rate reduction in September—the first such move in four years. For many, the main focus will be on comments from Fed Chair Jerome Powell, particularly regarding whether the central bank might contemplate pausing its rate-cutting strategy in future meetings due to solid economic indicators. Citigroup’s economic surprise index, which assesses economic outcomes against expectations, is currently at its highest since April. Recent data revealed that the U.S. economy expanded at a robust 2.8% rate in the third quarter. The monthly employment report set to be released on Friday, serving as the last significant data point before the Fed meeting, contradicted this trend by showing almost flat job growth in October. However, this data was influenced by strikes in the aerospace sector and hurricanes that affected response rates in the payroll survey. “This week’s data … indicates that the justification for a rate cut remains valid,” said JPMorgan economist Michael Feroli in a note. “Even if the election is resolved by Thursday, we believe the uncertainties in the outlook warrant a careful stance regarding forward guidance from the Fed.”
