Explained: How The US Election Could Impact Global Stock Markets

The 2024 US presidential election is set to be a major event with far-reaching consequences for global markets. With a tight race between Democratic candidate Kamala Harris and Republican nominee Donald Trump, investors are on edge, closely monitoring how the election outcome will affect the US economy and, by extension, global stock markets.

Contrasting Visions for the US Economy

Both candidates have starkly different plans for the future of the US economy, which will have significant implications for the world. As the largest economy and a key global power, the policies of the next US president will shape international trade, defense strategies, and foreign relations. These changes will likely reverberate across global stock markets and economies, influencing market trends well into 2025.

Market experts have suggested that political gridlock, where policy changes are limited, could actually be the most favorable outcome for international markets. This is especially important considering the global uncertainties surrounding issues like the US-China tensions and the ongoing crisis in the Middle East.

Global Investor Sentiment Ahead of the Election

In the lead-up to the election, global investors have sought the safety of the US dollar amidst growing market volatility. The price of gold, often seen as a hedge against uncertainty, has surged to record highs, reflecting fears of global instability. Investors are particularly focused on how the next administration will handle key areas such as tariffs, immigration, and economic relations—issues on which the two candidates hold very different views.

Historical Context: Democratic vs. Republican Administrations

Historically, the US economy and stock markets have tended to perform better under Democratic presidencies. According to a study by Lubos Pastor and Pietro Veronesi of the University of Chicago, between 1927 and 2015, the average annual GDP growth rate was 4.86% during Democratic administrations, compared to just 1.7% under Republican ones. Additionally, the “equity risk premium” of the US stock market was significantly higher under Democratic presidents, with a difference of 10.9% overall, and even 17.4% between 1999 and 2015.

Potential Market Impact of a Kamala Harris Victory

Although prediction markets currently favor Donald Trump with a 58.1% chance of winning, polling trends in key swing states suggest a tightly contested race. If Kamala Harris were to win, experts predict that market reactions could be volatile, with potential surprises and shifts. Harris’ victory might also bring about significant changes in trade policy, economic relations, and environmental regulations, which could have both positive and negative effects on various sectors.

Potential Market Impact of a Trump Victory

Should Donald Trump secure a second term, financial markets could experience higher volatility, particularly in the bond market. Trump’s re-election could also drive stock prices up, albeit with reduced market volatility compared to a Democratic win. Oil prices might drop, which could have further ripple effects across global markets, particularly in energy-dependent sectors.

What Happens with Political Gridlock?

Regardless of the outcome, a likely scenario is political gridlock, with the Republican Party potentially gaining control of the Senate while Democrats retain control of the House of Representatives. In such a situation, it would be harder for the new president to push through major policy changes, which could lead to a more stable market environment.

Market Expectations Post-Election

Will a Democratic win lead to a surge in stock markets? Historical trends suggest that the chances are slim. A Democratic victory would likely represent a continuation of current policies rather than a drastic shift. Additionally, the US economy is already experiencing strong growth following the pandemic, which may dampen the market’s response.

Markets have historically experienced gains in the lead-up to elections, regardless of the winner. According to research from Darrow Wealth Management, periods of political gridlock, where different parties control the presidency, Senate, and House, tend to deliver the most favorable market conditions.

Impact on Indian Markets

The outcome of the US presidential election is also likely to influence Indian stock markets, as many Indian sectors—such as IT, pharma, defense, oil and gas, metals, and industrial products—are closely tied to the US economy. Changes in US trade policies or regulatory frameworks could directly affect these sectors and subsequently Indian markets.

As the election approaches, rising volatility is expected, with stock corrections likely in the weeks following the formation of the new government. Investors are maintaining a cautious approach, carefully monitoring potential policy shifts that could affect global and domestic markets.

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