The final countdown: US election checklist

The time has come for the US electorate to cast their ballots if they have not done so already. But don’t expect a winner to be announced in the early hours. It could be days before the winner is declared.

The delays to the results are due to a few factors: each state sets their own voting hours, some states have accelerated their ballot-counting processes, for example, Michigan, and it could be one of the first swing states to announce results. However, Alabama, South Dakota and Oregon will only release results once all counties have closed voting.

Back in 2020, the Associated Press, which tends to be the first media outlet to officially report the result of the US election, did not declare Joe Biden the official winner of the presidential race until the Saturday after voting day. Thus, it could be a long few days.

More than 78 million voters have also cast postal ballots ahead of this election, and this includes approximately 700,000 more Democrats than Republicans. Thus, initial results on election night may look like they favour the Republicans, only for the results to change once the postal votes are counted.

The polls

The polls have edged closer in the final days leading up to the election. RealClearPolitics poll average has Harris slightly ahead with 48.7% of the vote and Trump winning 48.6%.

Interestingly, the national polls have consistently predicted a tight race, however, the market-based prediction polls have been solidly pricing in a Trump win for weeks.  These markets, where traders can bet on the outcome of the election, have narrowed in the last few days. On October 26th PredictIt priced a Trump win at more than 60%. However, since then the market-based probability of Trump winning the election has plummeted. PredictIt now put the probability of him winning at 54%.

As we get to the final stage of this race, the prediction markets are moving closer to the national polls, however, they are still predicting a win for Trump, albeit with a smaller margin.

Price action

In recent months, financial markets have acted like Trump is going to win this election. The ‘Trump trade’ is a strong dollar, weak bonds/ higher yields and stronger crypto. Since the start of October, the dollar index is higher by 3.5%, the 10-year US Treasury yield is higher by 71basis points, and Bitcoin surged above $70,000 at one stage last week.

Ahead of election day, financial markets have reacted to the narrowing in the polls and the smaller margin of victory for Trump in the prediction markets. The dollar is the weakest performer in the G10 FX space, and the dollar index is lower by 0.6% in recent days, Bitcoin is hovering below $69,000 and US Treasury yields are lower by nearly 10 basis points at the start of this week.

This suggests two things. Financial markets still think that Trump will win, although they are reacting to a narrowing of the polls. While a Trump victory has been tentatively priced out by the market, a win for Harris win could see a surge in short term volatility, a further unwinding of the long dollar/ short bonds trade, and crypto could remain under pressure.

If Trump wins then we could see a slightly stronger dollar, with a return to 105.00 possible in the dollar index. If Harris wins and if Congress is split between Republicans and Democrats, then we could see the dollar fall in the coming days.

Stocks

Stocks have been very bullish leading up to this election. The S&P 500 has made 47 record highs so far this year, and on election day it is currently only 152 points from its record high.

This suggests that the stock market may be ignoring politics because the outcome is too close to call, or that stock markets are not frightened of a Trump presidency and the prospect of higher inflation and rising bond yields. Financial markets and global economies have been extremely resilient in the aftermath of Covid, and as global central banks have increased interest rates to their highest level in decades. Thus, equity traders may see this election as a small bump in the road rather than an epoch-shifting moment for global capitalism and democracy.

Chart 1: The Trump trade

Source: XTB and Bloomberg

Stock market price action

In the 5-days leading up to this election, the best-performing sectors on the S&P 500 include the IT sector, consumer electronics, retail and home furnishings. The weakest performers include the gold sector, oil and gas and auto manufacturers. These sectors are all linked to Trump. He is a big fan of US energy production, likewise his tariff plans could hit the export hopes of US car manufacturers.

Gold has rallied more than 30% so far this year. It is a traditional inflation hedge. Since Trump’s tax policies are considered inflationary, the fact that the gold price and the gold sector in the S&P 500 have backed away from record highs in recent days, is another sign that the stock market may be tentatively reducing its exposure to a Trump victory, in case Harris wins.

Economic plans

Both candidates have given little detail about the meat and potatoes of their economic plans. However, in broad terms, Trump is seen as being good for the oil and gas sector, keen on lowering taxes and extending the TCJA- the tax cuts and jobs Act, which is seen as boosting inflation and the US deficit.

In contrast, Harris has remained tight lipped about the TCJA, suggesting that she could let it expire in 2026. Instead, she has proposed measures to help the middle classes, and a new tax on billionaires. She is seen as being pro renewable energy sources and tough on the healthcare sector, including limiting prices for certain drugs.

Thus, depending on who wins this election, the sectors listed above could be impacted.

What if the outcome takes weeks?

It is hard to know exactly what would happen in this scenario. Looking back to the Bush/ Gore election outcome in 2000. The election took place on 7th November, and George W Bush was not declared the winner until 13th December. Back then, the S&P 500 dropped by more than 10% after election day. However, the S&P 500 was already in a down trend, and it extended losses over the following years as the US reeled from the 9/11 attacks and the fallout from the dotcom bubble.

This time, US stocks are close to record highs, and they are in a well-established uptrend, led by trillion-dollar tech companies. The dominance of Google, Nvidia and Apple and their bullet proof balance sheets, means that the US index seems more resilient this time around. However, a period of civic unrest or a long delay before the result is announced, could see the index fall 10%, in our view.

Chart 2: The S&P 500 in the aftermath of the contested election between George W Bush and Al Gore in 2000

Source: XTB and Bloomberg

Conclusion

This is a tight race, and the era of a winner being declared on election night is over. It will take a number of days before we know who will win. Financial markets have been steadfast in pricing in a Trump victory, however, that has started to waver as the polls have narrowed. The long-term impact for US markets will also depend on who wins the Congressional race. Unless one candidate gets a clean sweep of the White House and Congress then the impact on financial markets could be limited.