FX.co ★ 4 scenarios for US stock market to react to presidential election

Status quo

This scenario is likely to occur if Donald Trump wins. Republicans will continue to control the Senate, while Democrats will remain in power in the House of Representatives. As a result, the stock market will rise by 3-5%. Importantly, when Trump won the election back in 2016, the stock market asserted its strength considerably. Donald Trump cut income taxes and simplified the regulation system. Investors expect him to maintain his current tax overhaul strategy if he is elected for a second term. However, during Donald Trump’s presidency, the country's economy has faced a recession, which is still seriously affecting the economy. The re-election of the current US President will have a positive impact on the defense industry, the financial sector, and the IT sector.

Democrats takes lead in Senate

This scenario is possible in case of Joe Biden's victory. Democrats will control the Senate, as well as will the House of Representatives. At the same time, stock markets will fall under the strong bearish pressure, which will quickly end. The S&P 500 may sink the most, declining by 2-5%. Investors should prepare for major changes, as well as higher taxes. Historically, the election of a democrat as the President leads to a noticeable decrease in the stock market. Nevertheless, if Biden wins, the infrastructure sector is sure to grow, while the pharmaceutical industry and the IT sector may extend losses.

Biden wins election, Republicans controls Senate

Analysts think that this scenario will be the most favorable for the stock markets as it will advance by at least 4-5%. The new leader is most likely to continue Donald Trump's policy of easing financial regulations and reducing taxes. Notably, Joe Biden is even more unpredictable when it comes to trade relations than Trump. It is difficult to envisage his first steps in the trade policy. Perhaps he will take a less aggressive approach that will have a positive impact on the stock market, in particular on the S&P 500 index.

Election delay

This scenario may be the most negative for the stock market. US equities may suffer serious losses amid the uncertainty over the election race. If the election results are considered illegal and fraudulent, the stock market may collapse. In 2000, a similar incident occurred in Florida that triggered a steep fall in the S&P 500 by 10% and the NASDAQ by 20%. In the upcoming presidential elections, such a scenario looks quite possible. If the election results are declared illegal, the stock market will plummet significantly. It will be under the strong bearish bias until uncertainty eases.