Why the Election Outcome Could Shock the Markets

Throughout most of 2024, stock-market investors showed little concern over whether Donald Trump or Kamala Harris might win the presidential race. However, with Election Day just two weeks away, political anxiety has finally begun to impact equities.

This week, a notable climb in Treasury yields, which have been on the rise since September, rattled the U.S. stock market. The selloff raised worries that this surge might jeopardize what’s been a record-breaking year for stocks as the election draws near.

On Wednesday, U.S. markets saw a dip with the S&P 500 and Dow Jones Industrial Average both falling nearly 1%, marking three consecutive days of declines — the longest losing streak since early September. The tech-focused Nasdaq Composite dropped by 1.6%, its sharpest daily decline since early September, according to Dow Jones Market Data.

The selloff aligned with long-dated Treasury yields hitting their highest levels in nearly three months. Many investors worry that the election could exacerbate the fiscal deficit, while rising odds of a Trump victory in a close race, combined with expectations of less aggressive monetary easing from the Federal Reserve in November, weighed on the market.

Concerns have heightened over both Trump’s and Harris’s economic policies, each seen as likely to increase inflation, interest rates, and deficits. However, Brad Neuman, senior VP at Fred Alger & Co., told MarketWatch that Trump’s proposals are anticipated to have a more inflationary impact.

Treasury yields have been climbing since mid-September, following the Fed’s rate cuts and strong economic data, yet the stock market had remained relatively calm until now. Last Friday, the S&P 500 closed at a record high, marking its 47th such close this year and capping a six-week winning streak — the longest since last December. On course for its best first ten months of an election year since 1936, the S&P is defying the seasonal trend by showing gains in October, often a volatile month in election years, as per Dow Jones Market Data.

Even as the Cboe Volatility Index (VIX), Wall Street’s “fear gauge,” has surged nearly 16% this month, it’s still below the “high volatility” threshold of 20.

Until recently, stock prices have seemed unaffected by fluctuations in bond yields and the dollar. Jonathan Krinsky, chief market technician at BTIG, remarked that investors have been more focused on the pace of yield increases than their levels, pointing to a sense of market complacency. However, stocks now appear to be absorbing concerns over both the election and rates. Krinsky expects broad downside risk for stocks in the coming weeks and anticipates a pullback in the S&P 500 to between 5,500–5,650. The index closed Wednesday at 5,797.42.

Aaron Clark, portfolio manager at GW&K Investment Management, told MarketWatch he doesn’t foresee a major selloff or spike in volatility before Election Day, as both candidates’ policies are likely to moderate post-election. He noted that “markets can’t predict which policies will actually be pursued or implemented,” suggesting that a divided Congress, which could temper drastic changes, would likely benefit markets and the economy.

Clark believes that a split Congress would limit significant policy shifts. While there may be modest adjustments in taxes, tariffs, or immigration policies, he expects any changes to be less extreme than current campaign rhetoric.

On Thursday morning, U.S. stock futures showed mixed movement: S&P 500 futures rose 0.4%, Nasdaq 100 futures climbed 0.8%, while Dow futures dropped slightly by 0.1%, per FactSet data.