For Americans tired of political advertising, there’s light at the end of the tunnel. Election day is next Tuesday.
The outcome of elections, particularly presidential elections, can have a material impact on investors. But will the result be positive or negative? I predict what will happen in the stock market if Donald Trump wins.
Image source: Getty Images.
short term bump
I’m fairly confident that some stocks will rally significantly if Trump is announced as the winner of the presidential election. For example, the former president frequently used the phrase “drill, baby, drill” to express support for increasing domestic oil and gas production. Oil stocks such as Chevron and ExxonMobil are likely to rise with President Trump’s victory.
But what about the stock market as a whole? I expect the S&P 500 (^GSPC 0.16%) to rise in the near term for three main reasons.
First, I think the stock market may rise with a sense of relief once the election is over. This was a very controversial and very close battle for the White House. My hunch is that whether President Trump or Vice President Kamala Harris wins, the S&P 500 will rise modestly as investors are happy that the uncertainty is over and may buy stocks. Dew.
Second, there may be a kind of “halo effect” from the Trump administration. The stock market did well during his four years in office, with the S&P 500 index up 70%. Some investors may base their expectations for Trump’s second term on how they view his first term. But to be fair, the S&P 500 has risen even more under the Biden-Harris administration, up 75% so far.
Third, President Trump’s proposal for further corporate tax cuts could inspire some confidence in the bull market’s continuation. If Republicans win the House and Senate, hopes of lower taxes could boost expectations that corporate profits will rise in the coming years. As profits rise, stock prices (generally) also rise.
long-term recession
However, I do not expect the stock market to soar after a possible Trump victory, nor do I expect any momentum to be sustained. In fact, we expect the S&P 500 to be in a long-term decline due to the inauguration of the second Trump administration.
The former president has proposed flat tariffs of up to 20%. He also called for tougher tariffs on cars made in China and Mexico. If Trump wins, I would be surprised if he doesn’t move forward with these plans, regardless of whether Republicans control Congress. The U.S. Constitution provides that Congress has the power to impose tariffs, but previous law gave the president wide discretion to impose tariffs.
UBS expects U.S. stocks to fall by about 10% under a “universal tariff scenario.” The investment bank believes certain industries are likely to be hit harder than others, particularly retail and automakers.
However, I wouldn’t be surprised if the S&P 500 falls more than UBS expected. Many economists expect higher tariffs to cause a resurgence in inflation.
If that happens, the Fed could choose to raise rates again after its recent rate cuts. My concern is that the combination of these factors will very likely result in a more pronounced and prolonged downward spiral in the stock market.
What should investors do?
Let’s assume my prediction was correct. What should investors do to prepare?I like Warren Buffett’s strategy.
Let’s take a look at Buffett’s movements over the past few quarters. He has saved up a large amount of cash for Berkshire Hathaway. But he hasn’t sold most of the stocks in his Berkshire portfolio. He also continues to buy some stocks with attractive earnings prospects relative to their valuations.
Most importantly, he remains focused on the long term. I think this is a good approach for any investor, especially when there are many stocks that are priced at a premium.
What if my prediction of what the stock market will do if Trump wins is wrong? Mr. Buffett’s strategy is still a smart one to follow. No matter who is in the White House, it would be wise to invest for the long term, have enough cash available when stocks are available at discounts, and be selective about the stocks you buy.
Keith Speights has held positions at Berkshire Hathaway, Chevron, and ExxonMobil. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool has a disclosure policy.
