Election Day Update

Polls are a long way from closed, but Election Day is finally here! Our LPL Research team has been busy breaking down the potential outcomes, what policy changes are at stake, and how they could impact the market. Here is a quick summary of some of the research we have been working on lately:

• Election Stock Market Playbook — Latest Weekly Market Commentary discussing key policy differences between candidates and factors that may determine how markets react to potential election outcomes.
• Spooky Volatility Brews as Seasonality Improves — Recent blog on rising volatility and market performance surrounding elections.
• This Time Will Be Different — A recent whitepaper discussing the potential impacts of the 2024 presidential election on market volatility.
• Distinguishing Fact From Opinion — Provides historical context on U.S. presidential elections and how markets typically perform under different political regimes.
• Stock Markets: What To Expect When We’re Electing — A closer examination of seasonality trends during the presidential cycle.
• Can Stocks Predict Another Election Outcome? — Highlights how the stock market has been a good indicator of election outcomes.

As we wait for clarity on election results, polls and betting markets are pointing to an increasingly tight race. After being over a 30% favorite on Polymarket — the largest prediction market based on volume, although wagers are international — former President Trump’s edge over Vice President Harris dropped to 22% this week. Prediction website Kalshi — the only exchange regulated by the Commodity Futures Trading Commission (CFTC) — lists Trump as a 17% favorite, down from 26% last week, while PredictIt.org has him at only a 4% favorite.

Polls are even tighter, with the Real Clear Politics general election polling average for both candidates nearly tied. And let's not forget about the election indicator, which points to a Harris win based on the S&P 500’s positive performance during the three months leading up to Election Day (a negative return would point to a Trump win) or the improving Misery Index (unemployment plus inflation) also suggesting a Harris win.

Betting Markets & Polls Show a Tightening Race

Source: LPL Research, Bloomberg 11/05/24
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

When will we know who won? Most political analysts expect results will take days or even weeks depending on the narrowness of the victory, which could also mean recounts in key swing states. During the 2020 election, President Biden wasn’t declared the winner on most national television networks until late Saturday morning. The wait for the 2000 election results between George W. Bush and Al Gore really stands out as the winner wasn’t declared until December 12. This came nearly a month after the November 7 election and a Supreme Court decision to end Florida’s recount process, effectively giving the victory to Bush. As highlighted below, the S&P 500 recorded a maximum drawdown of 8% during this waiting period. For context, the S&P 500 had also recently violated its 200-day moving average and was starting to trend lower into the election, while (with the benefit of hindsight) the economy was also sliding into recession. Benchmark 10-year Treasury yields fell -0.57% over this time frame, and although similar to stocks, yields were also trending lower into November.

Market Performance During the 2020 Contested Election

Source: LPL Research, Bloomberg 11/05/24
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Since we likely won’t know the election winner today, we can at least explore potential investment winners and losers based on each candidate. We analyzed the correlation between the Trump and Harris Polymarket odds and the 74 industry groups within the S&P 500, using weekly percent changes since Harris announced her presidential election campaign on July 21. The table below highlights the five highest and lowest-correlated industry groups for each candidate.

Based on the correlation analysis, air freight, technology hardware, office REITs, and auto-related stocks could benefit from a Trump victory. In contrast, the healthcare space could expect headwinds as life sciences tools and services, biotech, and healthcare providers and services were all among the five most negatively correlated industry groups to Polymarket odds. In contrast, a Harris victory could benefit the healthcare space as her betting market odds have the highest correlation to life sciences tools and services and biotech, while the most negatively correlated groups include air freight, technology, hardware, and autos.

Correlation Comparison: Election Odds vs. Industry Groups

Source: LPL Research, Bloomberg 11/05/24
Disclosures: Indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results.

Summary

With Election Day finally here, expect more market volatility, particularly if the wait for a result is long or contested. Political divisiveness presents a risk to investor sentiment, though having gone through the “hanging chads” of the Bush vs. Gore election in 2000, legal challenges, recounts, and the January 6 experience, perhaps markets are battle-tested for election chaos. We can also take some comfort in history’s lesson that stocks tend to move higher in the months after elections regardless of the outcome. Most stock price movements over time are driven by earnings, inflation, and interest rates. Policy does matter, particularly tax and trade policy, but not as much as some might think.

LPL’s Strategic and Tactical Asset Allocation Committee (STAAC) continues to recommend investors stay fully invested at their targets for both equities and fixed income from a tactical asset allocation perspective — with potentially a small alternative investments position, funded from cash, to help mitigate potential volatility for appropriate investors. The Committee maintains a slight preference for growth over value, recommends keeping allocations across market caps generally in line with benchmarks, favors U.S. equities over their international and emerging markets counterparts and recommends an up-in-quality approach to fixed income.