Election 2024: What do the markets say?

If you’re hungry for more on this topic, listen to the audiocast, ‘Positioning for a delayed election result’, where the Morgan Stanley Wealth Management Global Investment Office discusses what's underscoring the tightness of the election.

The 2024 U.S. presidential election is now just days away and will be highly consequential for investors. The next president will play an important role in developing tax policy, influencing trade and industry, addressing U.S. government debt and deficits, and navigating geopolitical unrest.

With polls continuing to show Vice President Harris and former President Trump locked in a tight contest, investors may consider looking to economic indicators and stock-market trends for insight into potential election outcomes. Here’s what to know in the lead-up to Election Day.

In this close election, candidate prospects are a true toss-up. Our October 15, 2024, analysis found conflicting economic and market indicators¹, further clouding the reading of potential outcomes.

While not the only determinant, voter sentiment on the economy is correlated with presidential outcomes. For example, according to the Center for the Study of Democratic Institutions², a 5% increase in GDP results in a corresponding 6% gain in incumbent vote share.

However, in 2023 and 2024, we have seen a notable disconnect: Though Harris’ approval rating has increased since she entered the national spotlight, annualized GDP growth of 2.8% in 2024’s second quarter corresponded with a net-zero change in Biden’s approval rating¹.

This disconnect may be due to voters’ perceived wealth, amid still-high prices and interest rates. A recent Morgan Stanley Research survey shows inflation, jobs and the economy are the top concern for 63% of consumers¹, even as inflation cools. In addition to the pinch of higher prices, interest rates will likely remain high by historical standards, even as the Federal Reserve cuts its policy rate. This has made the handling of the economy a key issue in this election and a focal point for the Harris campaign.

The University of Michigan Consumer Sentiment Index fell to 68.9 on a preliminary basis in October, from 70.1 in September, mainly driven by a 5.2-point drop in sentiment among Republicans. The index remains well below its historical election-year average of 85.7¹, indicating that consumers’ struggles are ongoing.

In fact, going back to 1978, sentiment has never been this low in October of an election year, and the only two election cycles where it hovered near these levels resulted in party changes¹. All that said, sentiment is just one of many indicators of election results and should be viewed in the context of overall economic conditions.

Looking at broad market performance, in the past 20 of 24 general election cycles dating back to 1928, when market performance was positive in the three months prior to Election Day, the incumbent candidate won¹. The S&P 500 Index has performed positively month-over-month since April 2024¹, which suggests a potential tailwind for the Harris campaign.

The performance of different equity sectors can also offer insight into potential political outcomes, as investors position their portfolios for gains or losses ahead of anticipated policy changes that may affect an industry’s profitability.

Knowing this, we created two equity baskets, each containing 12 sector and industry exchange-traded funds that could benefit from a Democratic or Republican win.

• The Republican basket (which includes sectors such as Energy, Materials, Utilities and Real Estate) had outperformed the Democratic basket (including solar energy, tech and infrastructure stocks) by about 10% year-to-date as of October 15 — down slightly from a more than 11% margin in mid-September and in line with tightening polling and prediction odds¹.

That said, momentum shifts in the closing weeks of the campaign could create risks for stocks favored in the event of a GOP victory.

Looking more closely at specific industries and sectors, we find:

• Defense industry stocks, relative to the broader market, have closely tracked the Democratic odds of election victory in 2024, which appears to run counter to a traditional assumption that Republican administrations are more favorable for defense sentiment. We maintain a positive long-term view on defense regardless of who occupies the White House, as current geopolitical tensions continue to drive robust bipartisan spending and national security prioritization.
• On the other hand, technology sector stocks, relative to the broader market, have closely tracked the odds of a Republican presidential victory in 2024. While artificial intelligence and tech development and regulation remain bipartisan priorities, Trump may be seen as the deregulation candidate, a potential plus for the industry.

Importantly, investors should keep in mind that while these indicators may offer insight into sentiment at a given point in time, they are not predictive of actual outcomes, nor should they be viewed as an endorsement of any political party.

Also, while political outcomes and corresponding policy shifts may impact company profitability, the business and economic cycle are likely to be more relevant to market performance.

The potential for a delayed or contested election result depends on two primary factors:

• The speed of counting mail-in ballots in different states: Twenty-three states will only begin counting ballots on Election Day, while 15 others will begin after polls close on Election Day.
• The tightness of the race: Thin margins in states critical to clinching the electoral college vote could trigger delays or even legal contests, while a wide margin would better secure the candidate’s position. Given tight polling margins in swing states, our base case is that an election delay could last days or even weeks.

This matters for investors, because delayed election results introduce a period of uncertainty and speculation, which historically has resulted in elevated levels of short-term market volatility.

• For example, the 2020 election saw a 40% spike in the CBOE Volatility Index (VIX), known as the stock market’s “fear gauge,” that lasted for three days post-election until a winner was officially declared¹.

We expect a contentious final sprint to Election Day as campaigning accelerates, proposals sharpen and competition increases for swing-state voters. An unexpected political event or revelation, known as an “October surprise,” could marginally sway the election in either direction, and mail-in voting and staggered ballot counting, as well as the sheer tightness of the race, could leave the election result undetermined for some time and drive heightened market volatility.

Investors should keep their long-term objectives in mind during such periods.

For a weekly recap of the markets and thoughts on the week ahead, visit our weekly Market Dashboard.

Article Footnotes:

¹ US Policy Pulse: 2024 General Election Series report from Morgan Stanley’s Global Investment Office. This report serves as the primary source for this article.

² Center for the Study of Democratic Institutions, Vanderbilt University, Nashville, TN, 2024.

This article by Monica Guerra, Head of Policy, Morgan Stanley Wealth Management, and Daniel Kohen, U.S. Policy Strategist, Morgan Stanley Wealth Management was originally published on October 18, 2024 as “Election 2024: What Do The Markets Say?”

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