Markets are now watching the election

We’ve put it off for as long as possible.

But the first Biden-Trump debate on Thursday could mark the moment when this year’s race for the White House will start to weigh on financial markets — not to mention the national psyche.

The influence of politics on markets will likely grow over the next six months, ahead of the November 5 vote. But analysts are already sketching out how they think markets will react to various electoral scenarios.

Such analyses are largely guesswork. No one can really say precisely why markets move, especially so-called “macro” markets like currencies and government bonds, which are influenced by a lot more than elections.

Still, these notes can offer helpful shortcuts, areas to watch for, and hints about how investors may be handicapping the race. Here’s a smattering of what we’ve read, arranged thematically.

The dollar

For now, Wall Street is zeroing in on Donald Trump’s concrete calls for new trade barriers as the most important issue for investors.

While the Biden administration has maintained some Trump-era tariffs and even imposed new ones on Chinese goods in recent weeks, the former president has called for much wider use of trade barriers, including a 10% across-the-board tariff on all imports, as well as a 60% (or higher!) tariff on all Chinese imports.

With Trump, it’s hard to say if this is a real proposal or bluster. But analysts are in broad agreement that a second Trump administration would make liberal use of trade barriers, setting the stage for a rerun of the noisy trade wars of the first term. Trade War 2.0 could whipsaw trade sensitive corners of the stock market, weaken the currencies of trading partners, and drive up the relative value of the dollar, Wall Street analysts say.

“We still see a stronger US dollar as the most reliable impact of a potential Republican victory because a stronger US dollar is the most consistent response to tariff risks,” Goldman analysts wrote in note last month.

Analysts at Morgan Stanley concur, writing in an election preview recently: “history suggests tariff talk resulting from a Republican White House win could boost the currency.”

Takeaway: Growing dollar strength as we approach the election could suggest global investors see a Trump win as likely.

Globally exposed US companies

In this Trade War 2.0 scenario, stock prices of companies who sell a large share of their products overseas may underperform — unless, like semiconductor producers, they’re benefitting from a secular theme strong enough to overcome these headwinds.

For one thing, a strong dollar lowers the value of revenues earned in other currencies. (In other words, the money an American company makes selling products in Britain or France, for example, turns into fewer dollars when those pounds and euros are converted back into greenbacks.)

On the other hand, share prices of American producers focused on the US market could rise. They could benefit from a re-shoring trend, or gain market share as tariffs make foreign-made products too expensive for American buyers.

Analysts at French investment bank Société Générale suggested that betting on a basket of stocks likely to benefit from such re-shoring could be a good way to take advantage of a Republican victory.

“Based on the policies likely to be adopted under Trump, we believe the index could outperform by more than 3x under a Trump presidency,” they wrote in a note earlier this year.

Takeaway: Slumping shares of big exporters, like Boeing for instance, as November 5 nears could mean investors are betting on a second Trump administration.

The safe bet? Volatility

While Wall Street analysts are loath to take a position on how the coming election will shake out, more than a few think a pretty safe bet is that the markets will get jumpier as we approach November 5.

“In the past 50 years, S&P 500 realized volatility was ~2 points higher in a US election year than in non-election year,” JP Morgan analysts wrote in a recent note. “While is still more than 6 months out, options markets are pricing in a material risk premium around the US elections in November.”

A separate Bank of America report spotlighted a 25% rise in volatility from July to November of election years, noting “the market has yet to price in a potential rise in political uncertainty.”

Takeaway: Buckle up.