The markets saw the debate too

It’s always a bit dangerous to try to ascribe specific reasons for any particular market move. But it seems pretty obvious that the shockwaves from Thursday’s US presidential debate are emanating through financial markets on Friday.

Popular opinion suggests that the debate had a decisive winner: Donald Trump.

Just look at how Goldman Sachs’ themed basket of stocks that should do well under a Trump administration is doing today compared to a similar basket of stocks that should benefit from a Democratic White House. It’s outperforming by more than 3 percentage points, the most this year.

On PredictIt, the odds of Trump winning the 2024 presidential election rose from 54% before the debate to as high as 64% during the event.

“President Biden and his team now have much more work to do to win re-election than Trump,” writes Kim Wallace, head of Washington Policy Research at 22V Research. “Biden flubbed softball opportunities from questioners and Trump, shocking Democrats and likely many non-Democrats as well.”

Here’s some of what we’re seeing in markets.

Solar sell-off

The most glaring stock-market reaction seems to be in shares of companies that would benefit from policies associated with Democratic priorities. Solar firms like Maxeon Solar Technologies, Sunnova Energy and First Solarare getting creamed as traders seem to be pricing in higher odds of Trump 2.0.

End of Obamacare?

Likewise, health-insurance companies that’ve built large businesses around the Affordable Care Act’s insurance plan exchanges are also suffering Friday. Oscar Health, HCA Healthcare and Tenet Healthcareare all taking it on the chin.

Prisons, private education, and coal companies romp

Conversely, companies investors think will do well under a Republican administration surged on Friday; foremost among them were private prison companies GEO Group, and CoreCivic (formerly Corrections Corporation of America), as well as private education firms such as Grand Canyon Education, and private college operator Laureate Education. Finally, coal companies Peabody Energy and Arch Resources had very good days, as some price in roll backs of climate-related Biden administration initiatives.

GSE reform back on the agenda

During his term, Trump backed attempts to privatize the government-sponsored entities Fannie Mae and Freddie Mac. Shares of both are up roughly double digits on Friday.

RIP, Fed independence?

Perhaps the most notable reaction of the day isn’t in the stock market, but rather in the market for US Treasury bonds. Despite really good news on the inflation front — the Fed’s key measure of inflation dropped more than expected to its lowest level since March 2021 — longer-term Treasury bonds tumbled, pushing yields, which move in the opposite direction, sharply higher.

Since long-term bonds typically rise when inflation comes down, this is a bit odd. It seems, at least to me, that some people are pricing in the long-term effect of a second Trump term on the “full faith and credit” of the United States.

Trump allies’ reported plans to fiddle with the Fed’s traditional independence from direct political control would explain some of that move. Efforts, typically by quasi-or-outright dictatorial governments, to control monetary policy usually works out horribly both for investors in those country’s bonds and for the country itself, as surges of serious inflation — see Turkish, Hungarian or Russian inflation rates in recent years — follows from printing money for political reasons.

Of course there are varying explanations for the move in US Treasury yields. The inflation data, though positive, was well telegraphed before its release and in line with economists’ expectations.

And the market could also be pricing in the potential for better growth thanks to more fiscal stimulus in the event of a united Republican government, or higher inflation because of Trump’s tariffs.

Speaking of Russia

One can’t help notice that the ruble — which really isn’t traded on markets much anymore — and Russian stocks were up slightly on the day. Hard to say why, though Trump’s friendliness toward the Kremlin could translate into easing the sanctions the world imposed on Russia for invading and occupying eastern Ukraine, or a potential end to the conflict — as Trump promised would happen if he wins the election, even before his term begins.

Currency confusion

But of course not everything in markets can be perfectly congruent. The most common Wall Street prognostication is that a Trump presidency would lead to a stronger US dollar (primarily because of the risk of tariffs). But the greenback is slightly lower on the day, as judged by the Dollar Spot Index, and lower against every G10 currency besides the Norwegian krone.