For the stock market, Trump's price rally jeopardizes election chances against safe-haven demand

By William Watts

Markets have taken precedence over the probability of a Trump election victory

A dark day in U.S. politics will provide a test for financial market players Sunday night as investors react to an apparent assassination attempt on former President Donald Trump.

The event could trigger a flight to safe havens like Treasuries and gold. It could also prompt investors to focus on perceptions of how Saturday’s shooting at a campaign rally in Pennsylvania will affect the race between Trump and President Joe Biden.

Any reaction could prove fleeting, as has been the case in most cases following the political and geopolitical shocks of recent decades.

“This is a horrible event. From a purely business perspective, we don’t see this event as having a dramatic impact in the near term,” Keith Lerner, co-chief investment officer and chief strategist at Truist, told MarketWatch Sunday morning.

While betting markets saw bets increase on a Trump victory, the overall move was in line with what was seen after Biden's poor performance in the June 27 debate.

Analysts have noted that the performance of the S&P 500 SPX since March has been positively correlated with the prospects of a Trump victory, as shown by prediction markets and polls. This relationship appears to be driven more by the desire for a clear outcome than by policy proposals. Indeed, before March, stock market performance was positively correlated with the probability of a Biden victory.

U.S. stock index futures will begin trading at 6 p.m. Eastern Time, as Asian financial markets begin opening for the week.

The rise in bitcoin (BTCUSD), which trades 24 hours a day, seven days a week, was seen by investors as a sign that markets are likely to price in better prospects for a Trump victory.

This relationship favors stocks, bitcoin and the U.S. dollar over bonds and other safe havens, Bob Elliott, chief investment officer at Unlimited Funds, said in an article on X:

Investors believe a Trump victory would be broadly bullish for the stock market because of the prospects of a renewed push toward deregulation and an extension of corporate tax cuts. At the same time, the increased prospects of a Republican victory have been cited as a catalyst for the bond market weakness that saw Treasury yields, which move opposite to prices, rise after the June debate.

While neither candidate appears likely to take action to address the rising U.S. debt, the possibility of a combination of tax cuts, proposed tariffs and other measures in a second Trump administration has become a priority for bond investors.

See: How the 'Trump Trade' Is Taking Over the Bond Market

“Given the widespread perception that the shooting increases the likelihood of Trump winning, we could well see Treasury yields jump, as they did after the debate,” while a flight to safety would have the opposite effect, Mark Rosenberg, co-CEO and founder of GeoQuant, a risk analysis firm, told MarketWatch.

But investors may also want to pay attention to early signs that bond investors are becoming increasingly sensitive to domestic political unrest in the United States.

GeoQuant is seeing growing, if superficial, evidence in its data that long-term Treasury yields are positively correlated with higher U.S. political risk, Rosenberg said. That tends to dilute the traditional flight-to-safety demand for Treasuries that is seen when the rising risk emanates from the U.S. political system itself, he noted, noting that the firm’s primary measure of U.S. political risk was already rising rapidly before Saturday’s events.

Archives: What US Political Dysfunction Means for the Stock Market and Investors (October 2023)

Stocks have been rallying in 2024, as they often do in presidential election years. The S&P 500 has gained nearly 18% year to date, in a rally led by mega-cap tech stocks. The more cyclically oriented Dow Jones Industrial Average DJIA has lagged, up 6.1% year to date.

Investors have little data on concrete precedents. Some point to the attempted assassination of Ronald Reagan in March 1981, shortly after he took office.

Stocks fell after news of the tax evasion attempt broke in a session that was shortened as the New York Stock Exchange closed earlier than expected. Performance over the next three weeks was relatively flat, with Treasury yields initially surging in a flight to quality and the U.S. dollar strengthening, Andreas Steno of Copenhagen-based Steno Research said in a note.

“I would bet on a similar trend here, assuming it has any impact,” Steno wrote.

At the same time, investors should not lose sight of other factors in the months leading up to the election.

“The Republican convention was already going to be in the spotlight this week, and this is going to amplify that attention. That said, the actual election is still almost four months away, and a lot can happen between now and then,” Truist’s Lerner said.

“We expect the most important market drivers in the near term to continue to be factors such as economic growth trends, inflation and corporate earnings,” he said.

See: As GOP convention approaches, here's how stocks have fared under Biden vs. Trump

-William Watts

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07-14-24 1305ET

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