Of the three most likely outcomes of the U.S. presidential election, two of them would likely point to further gains for the stock market, a closely followed strategist said Tuesday. But there’s a major wildcard to keep in mind.
“Bottom line, the Republican sweep is likely the most positive outcome for stocks into year-end, but in that scenario, we would need to brace for an uptick in volatility in 2025 as deficits and debt become a much larger portion of the conversation,” said Tom Essaye, founder of Sevens Report Research, in a Tuesday note.
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Treasury yields have risen sharply since mid-September, with investors and analysts tying the move at least in part to expectations a victory by former President Donald Trump would see significantly larger budget deficits relative to an administration headed by Vice President Kamala Harris. Both are expected to increase the nation’s debt load.
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The yield on the 10-year Treasury note BX:TMUBMUSD10Y has risen from around 3.6% in mid-September and was at 4.35%, up 6 basis points on the day, at midday Tuesday.
“Republicans are viewed as more pro-growth than Democrats, but they are also currently viewed by the market as more ‘pro deficit,’ and it’s unclear how hard Treasuries would fall/yields rise in the event of a Republican sweep,” Essaye wrote.
The strategist said his “gut” feeling is that the rise in yields (yields and debt prices move opposite each other) wouldn’t be enough to dent growth expectations and stop a stock market rally into year-end. Heading into 2025, however, an elevated 10-year yield could be a substantial headwind for stocks as investors learn more about actual policies, including trade, tariffs, tax cuts and other measures.
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The rise in the 10-year Treasury yield above 4.3% has raised alarm among some analysts, who contend the rate move has already been large and swift enough to raise questions about further stock-market gains.
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Stocks were showing strong gains Tuesday, with the Dow Jones Industrial Average DJIA up 340 points, or 0.8%, while the S&P 500 SPX rose 0.9% and the Nasdaq Composite COMP advanced 1.1%. The S&P 500 has rallied nearly 21% so far in 2024, hitting numerous records, while the Dow has gained 11.7% and the Nasdaq has surged 22.7%. Equities have largely moved sideways overall in recent sessions.
A sweep, in which a Trump win is accompanied by Republican control of the House and Senate, would likely see an acceleration of the stock-market rally into year-end, provided it isn’t untracked by a jump in yields, Essaye said.
A Harris win with a divided Congress would allow stocks to continue drifting higher, but probably not accelerate the rally, he argued. That scenario would remove the risk of disruptive policies for the next two years and allow investors to re-focus on positive macroeconomic fundamentals, including solid growth, Fed rate cuts and declining inflation, Essaye said.
A Democratic sweep would be a negative for equities, Essaye said.
“Democrats are viewed as less pro-growth than Republicans and with control of Washington, worries about increased regulation and tax increases would likely cause investors to sell first and ask questions later, especially given the large gain [year-to-date], he said.
A decline of more than 1% wouldn’t be a surprise and a pullback of 5% to 10% would be likely in the weeks following the election, with cyclical sectors lagging behind as megacap tech and defensive sectors like healthcare, utilities and staples — along with foreign markets — see relative outperformance.
A Democratic sweep would also likely see the 10-year Treasury yield fall back toward 4%, he said, as markets price in slower economic growth and a slower rise in the deficit, but the decline probably wouldn’t be enough to offset growth concerns.
Source: finance.yahoo.com