Explained: How US Elections Could Affect Global Stock Markets

The United States presidential election, scheduled on November 5, is going to be closely watched worldwide. With opinion polls indicating a tight race between Democratic Party candidate Kamala Harris and Republican nominee Donald Trump, investors and market experts are being cautious.

Both candidates have presented starkly contrasting visions for the future of the US economy, each carrying significant implications for the rest of the world. Being the world's largest economy and most influential global power, the outcome of the US Presidential election 2024 is likely to bring changes to trade agreements, defence strategies and foreign policies. This in turn may affect economies and stock markets globally.

The policy stance of the newly elected government is going to shape the future of the global economy and market trends early next year.

According to a Forbes report, markets may favour a scenario of political gridlock, where policy changes could be limited.

Global investor sentiment

This election is shaping up to be one of the most consequential events for international markets and economies, with the outcomes expected to reverberate well into the next year. Ahead of the elections, a noticeable trend is being noticed among global investors. They are piling into the US dollar amid volatility, according to a report by The Economic Times.

This election comes at a time of rising tensions with China and an ongoing crisis in the Middle East. The price of gold, traditionally seen as a hedge against uncertainties, has surged to record high levels in the last few trading sessions due to all these global factors.

The investors will also closely monitor the newly elected government's policies on tariffs, immigration, economic relations and IT sectors, with both the leaders having quite contrasting views on all these crucial aspects.

Historical context

According to a report, a broader view of the last century suggests that the US economy and its stock markets have generally fared better under Democratic administrations in two critical metrics.

Citing a report by Lubos Pastor and Pietro Veronesi from the University of Chicago, covering the years from 1927 to 2015, the outlet stated that the average growth rate of gross domestic product (GDP) was 4.86 per cent during Democratic presidencies, compared to just 1.7 per cent under Republican ones.

During this same timeframe, the "equity risk premium" of the US stock market was found to be 10.9 per cent higher under Democratic leadership. This disparity was even more pronounced from 1999 to 2015 when the premium reached 17.4 per cent under Democratic presidents.

Potential impact of Kamala Harris' win

Though prediction markets like Polymarket suggest a higher likelihood of Donald Trump emerging victorious, assigning him a 58.1 per cent chance of winning as of November 2, reports indicate that this perspective contrasts with the tightly contested polling in many swing states, which points to a more balanced race. Consequently, while stock fluctuations are expected regardless of the outcome, a potential victory for Kamala Harris could lead to greater market surprises and shifts, according to a Forbes report.

Potential outcome of a Trump win

If Donald Trump secures re-election, the markets could experience heightened volatility in the bond sector, alongside an increase in stock prices but with lower volatility, a research report by the Bank of Italy suggests. In addition, oil prices may also drop leading to further impact on stock markets globally.

What happens if there is political gridlock?

Regardless of the election results, indications suggest that political gridlock may be on the horizon. Current polling trends show that the Republican Party is positioned to take control of the Senate, while the Democrats are expected to maintain their hold on the House of Representatives. Although these forecasts could change, the most probable scenario is that the incoming US President will have to navigate a legislature dominated by the opposing party, making it more challenging to implement policy decisions.

Overall, what to expect from the markets

Will a Democratic victory lead to a stock market surge? According to The Conversation, the chances are low, and there are two main reasons for this. First, a win for the Democrats would represent a continuation of current policies rather than a significant shift away.

Secondly, this potential Democratic success would occur against the backdrop of a strong economy, as the US has experienced considerable growth since the pandemic.

Historical data suggests that markets often experience an uptick in the days leading up to the election, irrespective of the outcome. Forbes also cited research from Darrow Wealth Management, indicating that periods of political gridlock - where different parties control the presidency, Senate, and House of Representatives - tend to yield the most favourable outcomes for market performance.

Potential effects on Indian markets

The US Presidential poll results may have an impact on Indian stock markets as many companies across sectors are dependent on the American markets. Sectors such as IT, pharma, defence, oil & gas, metals and industrial products are likely to be more affected in India.

Overall, trends suggest rising volatility during elections and corrections in subsequent weeks after the formation of the new government. Investors continue to take a cautious approach while monitoring key policy decisions.