The current bull market could gain renewed momentum.
Which presidential candidate will win the election? Most polls show a close race between Vice President Kamala Harris and former President Donald Trump with only three days to go before Election Day. With such a close contest, a victory could be determined by small numbers of votes in one or more swing states.
I won’t attempt to predict whether Harris or Trump will prevail. However, I’m more confident about predicting what will happen with the stock market if Harris wins.
Image source: Official White House photo by Lawrence Jackson.
A relief rally
I predict the S&P 500 (^GSPC 0.41%) will rise if Harris is declared the winner in the presidential race. But I also think stocks will move higher if Trump wins. Why? I expect a relief rally either way.
If there’s one thing investors uniformly despise, it’s uncertainty. A lack of clarity about the future makes decisions about where to invest more difficult. Uncertainty can often serve as an anchor on the stock market. When the uncertainty is removed, though, the anchor disappears, allowing stocks to gain.
Because of the tight presidential race and the significantly different policies of the two major presidential candidates, investors currently face a lot of uncertainty. I’m unsure if the uncertainty will be gone immediately after Tuesday’s elections. It’s possible we won’t know who the winner is until days or even weeks later. However, when we do know, the stock market is likely to respond positively to the removal of the uncertainty.
I don’t expect a relief rally will last very long, though. Once the collective exhale of investors is over, other factors will weigh more heavily — in particular, which policies proposed by the winning candidate are likely to be implemented.
Divide and conquer
Let’s assume that Harris defeats Trump. How will stocks perform after the initial relief rally ends? I think it depends on which party controls Congress.
Some stocks should soar if Harris wins with her fellow Democrats gaining majorities in the Senate and House of Representatives. For example, the vice president’s housing proposals would more likely be implemented with a sweep of the elections. I predict top homebuilders D.R. Horton, Lennar, and NVR would be very popular with investors.
Democrats have a steep hill to climb in holding onto the Senate. They’re defending all but three of the 15 battleground Senate seats. Decision Desk HQ predicts Republicans have a 71% probability of winning the Senate.
I predict that the current S&P 500 bull market will gain renewed momentum with Harris as president and the GOP controlling at least one chamber of Congress. Historically, stocks have performed best when there’s a divided government with a Democratic president.
This environment could provide the best of both worlds for investors. Harris beating Trump would mean that the former president’s steep tariffs won’t be implemented and cause inflation to mount an ugly comeback. Republicans controlling the Senate and/or the House would likely doom Harris’ plans to raise corporate tax rates. The only legislation that would pass would be bills that can secure bipartisan support.
Known unknowns
While I admit I could be dead wrong, I’m relatively confident in my prediction of a relief rally followed by a continued bull market with a Harris victory. That said, some “known unknowns” could cause my prediction to fall flat on its face.
A major geopolitical crisis could cause the S&P 500 to plunge. For example, a full-blown war between Israel and Iran would almost certainly be bad for stocks. Another pandemic would probably cause the stock market to sink. Unexpected interest rate hikes by the Federal Reserve could be problematic.
Things can happen that derail any prediction regardless of how much merit it might have. However, these “known unknowns” would likely cause headaches for investors if Trump wins a second term, too.
The good news: Investors will soon be able to cross one major known unknown — who will be the next president — off the list.
Keith Speights has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends D.R. Horton, Lennar, and NVR. The Motley Fool has a disclosure policy.
