US election result more than the ‘Trump trade’

The ‘Trump trade’ has helped push US markets to record highs this year in the lead up to November 5 election
But a surprise or unclear result could spark a sell-down
Whoever becomes President, and whatever party controls Congress, strong company fundamentals will always win

Markets have priced in a Republican sweep of the presidency and Congress, but that is an unlikely and dangerous bet.

Our news and social media feeds are now jam-packed with opinions about what a potential Trump or Harris presidency would mean for markets. But the real driver of markets after the election may be something many investors are overlooking, and they may be in for a shock.

After all, presidents cannot pass legislation or amend it. The only option they have is the threat and power of veto.

Legislative power lies with the US Congress, where laws are made (in the House of Representatives) and reviewed (in the Senate) – and its control is balanced on a knife-edge.

The delicate balance

Of the 438 House of Reps seats, Republicans hold a slender majority of 222 and the Democrats occupy 213. Three seats are currently vacant and will be filled by the election of new members on November 5.

The Senate is even more precarious, with Democrats holding a majority of 51 (48 members plus 3 independents) over the 49 Republican senators.

These razor-thin majorities – and the prospect of them continuing in the divided nation – are escaping much of the focus because conventional wisdom seems to be that the party of the elected President will sweep both houses.

Numerous well-known commentators make the race for the Reps too close to call. Yet the lesson of the previous two US presidential elections and other votes around the world such as Brexit, show that divisive campaigns can prove the pundits wrong – and spur market-moving surprises.

Trump trade

The ‘Trump trade’ has helped push the S&P 500 to its 47th all-time high this year on hopes of Republican promises to cut taxes and the party’s reputation for business-friendly policies.

Those hopes seem to have pushed aside concerns about the strengthening US dollar and higher short-term interest rates, which could indicate that the tariffs promised by Trump are inflationary and will keep rates higher for longer.

This aggressive positioning leading into the election could make a sustainable post-election surge – or another ‘Trump bump’ – less likely, even if many traders get their preferred result on November 5.

Clear Democrat control of the House, the Senate and the Oval Office may see immediate selling in anticipation of announced and potential tax increases – particularly capital gains, and international and billionaire taxes.

Reactions to the possibility of a sweep are easier to predict than a mixed result. A Trump-controlled White House and Democrat control of Congress could see a fractious and frustrating four years, and lead to market despair. The alternative — Republican control of Congress and Harris as President, could spark a similar reaction — a slow-burn sell-down.

Another scenario is a result so close that it is weeks before the winners are known. This development would likely fray market nerves and ignite a huge spike in daily volatility.

Whatever the immediate indications, investors may do well to remember that promises are not policy. And even intended policies don’t always translate into investment outcomes.

Then there’s the crypto markets. Trump has courted the crypto bros as part of his campaign. While he has not offered any specifics, there’s a sense he will adopt more crypto-friendly measures. The form those take remains unclear, but with Bitcoin moving to within 8% of its all-time high, the risks in the trade may outweigh potential rewards.

And that’s an important reminder about investment strategies in general – that they should not focus on single events but acknowledge that markets rise and fall many times over the life of an investment, or a portfolio.

Crypto bros, meme stocks and DJT

Despite all the noise leading up to the November 5 showdown, historical data suggests economic and inflation trends play a far more significant role in shaping market returns than election results.

Smart investors will focus more on those macroeconomic factors than which individual stocks may do well under Trump, meme stocks such as Gamestop and AMC Entertainment being cases in point.

Perhaps even more so is the Trump Media and Technology (NASDAQ:DJT) listing. The major financial asset here is Truth Social, a social media platform. While it may deliver public relations benefits, there is scant evidence to suggest it is financially viable.

However the election is decided, stocks that are dogs will likely remain dogs.

Michael McCarthy is a market strategist at online share-trading platform moomoo Australia.

This article was developed in collaboration with moomoo Australia, a Stockhead advertiser at the time of publishing.

The views, information, or opinions expressed in the interviews in this article are solely those of the contributing author and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.