How Will the Election Impact the Stock Market?

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The U.S. presidential election on Tuesday, November 5, is just a few weeks out and polls show the race remains head-to-head between Vice President Kamala Harris and former President Donald Trump. The election could create a roller-coaster ride for investors in both the lead-up and the aftermath.

Indeed, "volatility typically spikes as we approach an election," says Austin Pickle, investment strategy analyst at Wells Fargo Investment Institute (WFII). "A tightly contested and open election where the incumbent is not seeking reelection, as we have currently, only serves to increase the uncertainty."

Whoever wins in November cannot single-handedly move stocks up or down, of course. And making investment decisions based on what you think the election outcome will be "may lead to costly mistakes, like getting out of stocks based on a hunch and missing rewarding returns," writes Wes Crill, senior investment director at Dimensional Fund Advisors, in his published commentary "Bulls, Bears, and Ballots: When Looking at Politics and Markets, Think Long Term."

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Indeed, Crill notes that there's "a stronger case for investors to look past elections and maintain a steady approach to markets – in other words, make a long-term plan and stick to it. As Dimensional Founder and Chairman David Booth has said, 'Vote with your ballot, not your life savings.'"

To be sure, stocks have historically done well, no matter which party is in office. "What matters more is how the economy, profits, inflation, and Fed policy all lineup, not who is in the White House," writes Carson Group in its Midyear Outlook. "What should matter for investors is that all of those things are likely tailwinds for the foreseeable future."

However, Ryan Detrick, chief market strategist at Carson Group, notes that the stock market historically struggles in the two months leading up to the election – and then tends to rally into year's end once the event is over.

Overall, the S&P 500 has averaged an annual return of 12.2% in election years since 1928 and has finished the year positive 83% of the time, according to LPL Financial.

And any potential stock market volatility does create opportunity, says WFII's Pickle, adding that investors should have a shopping list ready.

With that in mind, here's a closer look at what sectors or stocks to buy for a Harris presidency and what sectors or stocks to buy for a Trump presidency.

Stocks that could benefit if Harris wins

Alternative energy could get a lift if Vice President Kamala Harris ascends to the presidency in November. She has long been a vocal supporter of renewable energy, including wind and solar, which could support investments such as the iShares Global Clean Energy ETF (ICLN), as well as individual alternative energy firms.

Relatedly, the Democratic party has made moves to support a transition toward electric vehicles (EVs) over the prior years and it's realistic to expect that would continue in a Harris-led White House. EV tax credits aside, the most impactful policies could be direct grants to manufacturers to help older automakers retool and more new entrants scale up to meet demand. That could be good for upstarts such as Rivian Automotive (RIVN), as well as old guards Ford Motor (F) and General Motors (GM).

Additionally, the Harris-Walz ticket is the first major presidential campaign to publicly support cannabis reform. (Though Trump recently said he'd vote to legalize recreational weed in Florida.) There has been wide investor interest in marijuana stocks, including through exchange-traded funds (ETFs) such as the AdvisorShares Pure U.S. Cannabis ETF (MSOS), and these stocks and funds may see a tailwind if Harris takes the White House.

Stocks that could struggle if Harris wins

Harris has proudly proclaimed that she fought big banks as California's attorney general, including on mortgages and student loans. That means the financial sector might have to come to grips with the possibility of stricter regulations under a potential Harris administration.

Meanwhile, as vice president, Harris has worked with President Joe Biden to strengthen the Affordable Care Act (ACA). As a result, Harris is likely to continue to support healthcare initiatives, such as working to lower insurance premiums and keep prescription drug costs in check. Though that may be good news for Americans with high medical expenses, it could also tighten margins for insurers and drugmakers.

Stocks that could benefit if Trump wins

In contrast to the Harris campaign, former President Donald Trump has been vocal in his public support for energy plans that rely on fossil fuels over alternative energy sources. Trump has promised to roll back environmental regulations, hasten permitting and review tax benefits for the oil and gas industry.

In general, these policies would favor integrated large-cap energy stocks such as Exxon Mobil (XOM). They would also benefit smaller oil and gas stocks, including those found in the Invesco S&P SmallCap Energy ETF (PSCE).

Though a less straightforward investment thesis, another "Trump trade" that could benefit from a Republican win would be investments in domestic-focused stocks. Donald Trump has made no bones about raising tariffs or playing hardball with economic adversaries like China, which could be a boon to home-grown companies with 100% domestic operations.

Domestic industrial companies and manufacturers in particular could stand to benefit – but it's critical for investors to understand supply chains and related relationships to make the most of this potential opportunity.

Lastly, the Trump administration has made very favorable statements toward the cryptocurrency industry – and recently launched his own crypto business, World Liberty Financial. That may not necessarily boost bitcoin prices, but it could allow related companies such as cryptocurrency exchange Coinbase Global (COIN) to enjoy a much less stringent regulatory environment.

Stocks that could struggle if Trump wins

In contrast to domestic manufacturers, multinational firms could very much find themselves at a disadvantage under Trump.

From retaliatory tariffs to outright "trade wars," global brands that rely on overseas customers could take a hit if Trump wins the election. That's particularly true for blue chip stocks such as Nike (NKE) and Apple (AAPL) that do big business in China today. As mentioned previously, supply chains and interrelationships will be key here.

Lastly, as the logical extension of policies favorable to fossil fuels, Trump could cut subsidies or federal breaks for green energy stocks such as Enphase Energy (ENPH) or SolarEdge Technologies (SEDG).

Jeff Reeves writes about equity markets and exchange-traded funds for Kiplinger. A veteran journalist with extensive capital markets experience, Jeff has written about Wall Street and investing since 2008. His work has appeared in numerous respected finance outlets, including CNBC, the Fox Business Network, the Wall Street Journal digital network, USA Today and CNN Money.