U.S. stocks rose at the start of a busy week of corporate earnings, with traders also bracing for the U.S. presidential election and key economic data that will pave the way for the next Federal Reserve decision.
All major groups in the S&P 500 posted gains, except for energy stocks, which were hurt by lower oil prices.
Crypto stocks surged, with bitcoin up about 3%. Trump Media & Technology Group Corp. surged 22% as retail traders piled into the stock after Donald Trump’s high-profile event in New York on Sunday. The company’s shares have been trading as a gauge of sentiment about the former president’s perceived chances of winning the election, with recent moves tied to betting markets rather than actual polls. Conservative video network Rumble Inc. surged 14%. Ford Motor Co. fell in the final hours of trading after it cut its earnings forecast.
Trump is more beneficial to stocks and Bitcoin
A Trump win would be more beneficial for stocks and bitcoin than his Democratic rival, while a Kamala Harris presidency would bring more relief to housing costs, according to a Bloomberg Markets Live Poll. Some 38% of respondents see stocks accelerating a year from now under the Republican candidate, versus 13% under Harris.
Markets have been very active over the past month, with traders reviving an already bullish scenario for stock valuations, making it more likely that Republicans will sweep into the bullish side of the equation, said Lisa Shalet of Morgan Stanley Wealth Management.
Ritholtz Wealth Management’s Kali Cox said the pre-election jitters haven’t yet shown up in the stock market. The S&P 500 hasn’t seen a day up or down 1% this month. If that trend continues, she said, this will be the first October without a big move since 2017. It will also be the first October in an election year without a 1% move since 1968.
“We’re heading into a busy two weeks,” she added. “The election conversation will be the noisiest, but markets may care more about the earnings and economic data releases. The results could be noisy, especially on the jobs side.”
Economic resilience and job growth stagnation
A week before the Federal Reserve meets to weigh the appropriate pace of interest rate cuts, data is set to show underlying resilience in the U.S. economy and a temporary glitch in job growth. Investors are also awaiting earnings from companies that account for nearly 42% of the S&P 500’s market value, including several big tech companies such as Apple, Meta and Microsoft.
The S&P 500 rose 0.3%, the Nasdaq 100 was little changed, the Dow Jones Industrial Average rose 0.6% and the Russell 2000 Small-Cap Index rose 1.6%.
Bonds fell amid weak demand for a pair of U.S. Treasury bond sales. The Treasury Department cut its estimate for federal borrowing for the current quarter, while continuing to forecast a cash balance of $700 billion at the end of the year. Oil prices fell as Israel limited its strikes on Iran to military targets.
Focus on long-term goals
This week's earnings and jobs data from tech giants will provide a lot of potential momentum for the market in the near term, but it remains to be seen whether investors want to sit on their hands until after the election, especially given the volatility around past elections, said Chris Larkin of ETrade, a Morgan Stanley company.
He noted that stocks sold off in the week leading up to the 2016 and 2020 elections, and rose sharply afterwards.
For Nuveen's owner profile, it is important to remain focused on long-term investment objectives, paying attention to broader economic conditions and company fundamentals, as election-induced volatility has historically been short-lived.
“With that in mind, corporate earnings, inflation and the direction of interest rates should remain the structural drivers of financial markets,” she said, adding: “This was evident in the recent move in US Treasury yields, which bottomed out in mid-September following the Fed’s rate cut. Since then, the rise in yields, coupled with fundamentals, may have created another attractive entry point into one of our favourite fixed income sectors.”
Although the polls are very close, stock and bond markets have shown recent momentum that appears to favor an outcome that returns former President Trump to the White House, according to Anthony Saglimbeni of Ameriprise.
“Government bond yields have risen, the U.S. dollar has strengthened, and areas of the stock market that could benefit from reduced regulation and lower taxes have gained,” he said. “Some of this is due to a strong economy and rising earnings, while some of the momentum may be due to investors increasingly favoring a Trump win.”
Good performance no matter the result
Saglimbeni sees the market as capable of performing well through the end of the year, whether Harris or Trump wins in November, adding that major stock averages could see a rise by the end of the year, noting that fundamental conditions in the United States are strong, seasonal factors and historical trends are favorable for stocks, and knowing the election results will finally allow investors to move on to another topic.
Investors expect large-cap companies to lead the market under all election scenarios short of a Republican sweep, according to a survey by 22V Research.
“With a Republican sweep, investors believe that small-cap companies will lead,” the firm said. “Protective tariffs and more dividend-friendly tax policies may help explain the dynamics of higher Treasury yields and a small-cap outperformance if this scenario materializes.”
Based on the firm’s interactions with clients, investors are more focused on the implications of tariffs under Trump than deficit spending, which has certainty, she said. Investors expect 10-year yields to rise under Trump, but expectations for 10-year bonds are split between higher and lower under Harris.
Same approach as 2016
U.S. stocks are generally trending in the same direction as they did during the 2016 presidential election, though the signals are more mixed this time around due to different economic factors, according to Morgan Stanley strategists.
The outperformance of financial and industrial stocks shows that market movements are somewhat similar to those seen in 2016, the team led by Michael Wilson says. Materials and small-cap stocks, which outperformed relatively in the 2016 election, have lagged modestly since Oct. 1, when the odds of a Trump win began to rise more substantially in betting markets, they added.
While so-called Trump deals have gained popularity as the former president's chances of winning the election rise, Citigroup says the vote is close and we may see some rotation in the run-up to Nov. 5.
Strategists including David Grauman and Beata Manthey said Trump's popular trades, such as a strong dollar, low interest rates and a long rally in U.S. stocks versus the rest of the world, could limit the near-term rally.
Meanwhile, a global strategy that bets on a Harris win is based on a weaker dollar, lower nominal yields, potential tax hikes, and a general tilt toward climate-friendly policies, which means favoring rest-of-the-world stocks over the U.S., non-U.S. industries over energy and healthcare, and emerging-market stocks sensitive to a weaker dollar.
Reduce risk
With the election just a week away and polls pointing to a clear tie, investors are unlikely to take on much new risk and may even prefer to cut back until the outcome is clear, said Jason Draho of UBS Global Wealth Management. “Once the dust settles and the outcome is clear, macro fundamentals should take over and set the tone for the market,” he said.
“Have you heard the saying that markets prefer divided government? Of course you have,” asked Invesco’s Brian Levitt. “Admittedly, the numbers bear that out, though I would argue that the analysis is not statistically significant. In fact, returns tend to be driven by a few notable years in most cases.”
Levitt considers two possible outcomes of a divided government in 2024: a Republican president, a Republican Senate, and a Democratic House, which has previously produced the second-best outcome for stocks; and a Democratic president, a Republican Senate, and a Democratic House, a combination that hasn’t occurred since 1886-89, which he left out of the analysis.
“It’s worth noting that the U.S. stock market has posted strong positive returns in recent instances of one-party rule, including under Democrat Bill Clinton (1993-94), Republican George W. Bush (2005-06) and Democrat Barack Obama (2009-10), he said. “Everyone may know that the market works better under divided government, or everyone may confuse correlation with causation.”
Bond Guardians Return
The upcoming US election could herald the return of bond vigilantes to the market, as the Treasury Department prepares plans to issue new debt, says Wall Street veteran Ed Yardeni.
Bond vigilantes are a call made by the founder of Yardeni Research, who coined the famous phrase in the 1980s to describe investors who sell bonds to put the U.S. government back on a path of fiscal restraint.
“The scenario of increased bond vigilantism is certainly conceivable,” Yardeni told Bloomberg TV on Monday. “There is no discussion among any of the candidates about doing anything to reduce the deficit to deal with the debt, to deal with the government’s exploding net interest expense.”
