How will Wall Street react to American elections? History shows...

As Wall Street gears up for the US presidential election on November 5, investors are watching closely. The outcome could mean big changes for the financial markets, depending on who wins.

Tight race: Harris vs Trump

The race is intense between Democratic candidate and current Vice President Kamala Harris and her Republican opponent, former President Donald Trump. This election isn’t just about who will run the government – it could also bring significant changes to economic policies that impact businesses and investors.

Wall Street’s uncertainty

The New York Times reports that President Joe Biden’s decision to step out of the race has added to the uncertainty, which has already slowed corporate activity like mergers and stock offerings. Business leaders are wrestling with big questions about future policies: Will corporate taxes go up or down? Will Harris’s approach to controlling inflation affect profits? And how will Trump’s policies compare to his previous term?

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Harris’s recent remarks about being a “capitalist” have gained her some support in the business world, especially as her views on capital-gains taxes are less aggressive than Biden’s. On the other hand, Trump’s promises of tariffs, deregulation and tax cuts have rekindled investor interest. However, some are uncertain about what approach he would take if elected again.

The market’s signals

According to a report from Politico, the stock market might be hinting at a different story than expected about Trump’s chances in the election. The S&P 500, a major stock index, has jumped over 10 per cent since August. This is after Vice President Harris announced her 2024 campaign for president on July 21, 2024 following incumbent President Biden’s withdrawal of his bid for reelection and his endorsement of Harris earlier the same day. Historically, when the S&P 500 rises before an election, it often means the current party in power is likely to win again. This trend has predicted the election outcome correctly in all but four cases over the past 96 years. The recent rise in the S&P 500 could suggest the market expects Harris to win and continue Democratic policies.

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At the same time, many voters want clear answers in this close race and interest is high in both opinion polls and betting markets, which currently favour Trump. This has led to mixed signals: while some Wall Street leaders are betting on Trump, the stock market seems to lean toward Harris. This contrast shows just how complicated the election outlook is as investors try to make sense of it all.

Wall Street and presidential elections

Wall Street’s connection to US presidential elections started taking shape in the early 1900s. For instance, during the 1920 election, the stock market dropped as the country adjusted to life after World War I. However, Warren G Harding’s promise of a “return to normalcy” brought hope and by the 1928 election, Herbert Hoover’s win came during a strong economy leading to a major market rally—until the 1929 stock market crash.

The Great Depression

When Franklin D Roosevelt was elected in 1932, the country was in the Great Depression. His New Deal policies brought a positive reaction, though markets remained shaky. This era highlighted how presidential policies could strongly impact economic stability.

Post-World War II era

After World War II, this relationship grew deeper. In the 1940 election, investors were cautious, worried about defence spending and economic stability as the war continued. Later, John F Kennedy’s election in 1960 brought excitement to Wall Street. His focus on economic growth appealed to investors, even with Cold War pressures in the background.

The 1980s and 1990s

In the 1980s, presidential elections had strong effects on the stock market. Ronald Reagan’s win in 1980 led to a rally as investors anticipated tax cuts and less regulation. His re-election in 1984 boosted investor confidence even further. However, when George HW Bush was elected in 1988, optimism was more cautious, showing the market’s sensitivity to changes in leadership.

The 2000s

The 2000 election between George W Bush and Al Gore created major uncertainty for the market. Delayed vote counts and court battles led to big market swings. When Bush was re-elected in 2004, investors felt more reassured, viewing his policies as stable for business.

The Great Recession

In 2008, the election took place during a major financial crisis. Barack Obama’s win brought cautious optimism, though the market had hit a low point just before the election. This period highlighted the urgent need for economic recovery efforts.

The 2010s and beyond

The 2016 election of Donald Trump led to big swings in the market. His promises of tax cuts and less regulation boosted initial market growth, though uncertainty over how these policies would unfold caused ups and downs. By the 2020 election, the COVID-19 pandemic had severely impacted markets, but recovery followed as stimulus packages helped stabilise the economy. This showed how both political events and economic responses play important roles in market performance.

Role of politics in economic stability

Over the years, Wall Street has consistently responded to signals from presidential elections, reflecting investor feelings about stability and growth. The connection between elections and market trends highlights the importance of politics in shaping economic expectations. As the 2024 election nears, Wall Street will once again mirror the nation’s hopes and uncertainties at this critical point in time.