Best stocks for a Harris vs Trump election year
Updated
October 4, 2024
Key takeaways
There’s a cold, hard, somewhat boring truth about elections and the stock market.
In the last 75 years, American elections have not impacted the medium to long term for the US stock market. Yes, the election will undoubtedly keep causing short-term market swings, but these are just ebbs and flows. They don’t indicate a big picture change.
Tech stocks jumped, and energy stocks dipped, when Kamala Harris announced she’d secured the Democratic nomination. The market made a snap judgement that if Harris were elected, her policies would likely benefit and harm those sectors respectively.
Within days, those movements balanced out.
Once markets settle, and investors take a step back from emotion-driven trading, the big picture stays the same. With a long-term investment horizon, the US stock market is resilient. Historically, it’s grown regardless of who’s in power.
How do elections impact the stock market?
Elections grab attention, but factors like inflation, interest rates, and economic growth steer the market. Although presidents can influence those regulations, they don’t control monetary policy. That’s up to the Federal Reserve.
Lately, it’s been lowering interest rates, and as a result, U.S. inflation fell from 3.1% in January to its current level of 2.5%. If projections come true, that figure should keep ticking down into 2025.
US economic growth, on the other hand, is projected to slow next year.
The best predictors of long-term stock returns are rising economic growth coupled with low inflation. In the short-run, that combination isn’t necessarily locked in. In the long-run, the US stock market has consistently witnessed robust economic growth. And, in large part, has bounced back from every recession.
Is a Republican or Democratic president better for US markets?
The data is mixed when it comes to predicting the ‘best’ president to foster a better stock market.
Tax cuts and hikes are often pointed to as key factors that either boost or weaken the economy.
And the presidential candidates undeniably have opposing views on the topic.
If Trump wins, he may maintain the 21% corporate tax rate, or even reduce it to 15% for companies with US manufacturing.
Harris proposed raising corporate tax from 21% to 28%. She also suggested capital gains tax increases on Americans earning over $1m annually.
The pundits can’t decide what all this means.
Goldman Sachs claims a Harris win could lower the S&P 500’s earnings by 5%, while Trump’s policies might raise them by 4%.
But Morgan Stanley says that there’s minimal correlation between capital gains taxes and stock market performance over the long run. And a Bloomberg study found no connection between corporate tax rates and long-term stock performance.
While lower taxes could give firms a short-term lift, they certainly aren’t the only factor determining success. Some of the highest tax paying firms in the S&P 500 continue to outperform the rest, showing that strong businesses can thrive irrespective of policy changes.
An increase to capital gains could make the market temporarily less attractive for some investors, but history shows us time and again that investment fundamentals are what matter in the long run. Strong companies with sound strategies will continue to perform no matter the political landscape.
And that’s the main point. It’s best investing in stocks you’re happy to hold in your portfolio, even if you’re unhappy with the election’s outcome.
Yes, some stocks could get a leg up from a given president, but a good company won’t turn into a bad business overnight.
Companies that could benefit if Trump wins
If Trump wins, firms with major domestic operations, particularly in the oil and gas industry, will likely get some help from the president.
Some of the biggest American oil and gas producers are poised to benefit.
Trump recently met with America’s biggest oil tycoons, asking for $1bn in campaign contributions in exchange for rolling back pollution regulations. His victory could definitely derail President Biden’s $1tr plan for low-carbon energy investments, paving the way for a fossil fuel Renaissance.
Trump’s policies could also benefit American companies with tough Chinese competitors, if he stamps a heftier tariff on their exports. Major Chinese electric vehicle (EV) producers would likely face steeper tariffs, hindering their competitiveness.
On the flip side, US-based EV companies could benefit. Even though Trump has heavily criticised EVs and the subsidies supporting them, these companies could still gain an edge if Chinese EVs get pricier.
However, there are a lot of risks to these tax cuts and added tariffs. Trump’s lack of a clear plan to address the rising federal deficit which would ensue, might lead to inflationary pressures. These would have a negative market impact, on the whole. Companies dependent on Chinese-imported parts, or those especially sensitive to inflation could see their profits squeezed.
Companies that might thrive if Harris wins
On the flip side, Harris’s push for a green revolution could see some renewable energy stocks tick up the page.
In addition, Harris’s focus on affordable housing could boost homebuilders, well-positioned to gain from any ‘first homebuyer’ down payment assistance that Harris implements.
Cybersecurity firms could also thrive under Harris. As the former California attorney general, she has a track record with big tech and consumer protection.
Her plans to improve cybersecurity infrastructure could mean more government contracts alongside greater funding for cybersecurity firms. Though, cybersecurity is generally a nonpartisan issue. Neither party wants a country getting hacked and attacked by ransomware. So the industry’s likely poised to grow no matter who’s in charge.
How to trade for the US election
It might feel tempting to bet on the stocks that will soar post-election. But remember, even pollsters often get the election results wrong.
Trying to predict who will win, and what they’ll do for specific companies, is unlikely to be a fruitful endeavour.
The traders trying to time the market, or guess on those outcomes, lose money most of the time for a reason.
The market is unpredictable on the day-to-day, and politically driven gains often don’t last.
Instead of prioritising your investments based on the president you think could win, invest in the companies that win no matter what. Those are the ones which will succeed, notwithstanding who ends up in office.
A diversified portfolio can help protect you from any brief volatility from policy changes or election swings. A well-rounded portfolio is a more reliable way to grow your earnings, no matter the politicians in power.
Looking to round out your portfolio? Choose from thousands of US, UK, and European stocks and ETFs on Freetrade.
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