Institutional Insights: Goldman Sachs US Election Results & SP500 Reaction
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Institutional Insights: Goldman Sachs US Election Results & SP500 Reaction
ELECTION REACTION FUNCTIONS FICC and Equities
"It's not the voting that's democracy; it's the counting." - Tom Stoppard
Vol market currently pricing in a 191bp move for the S&P 500 through Wednesday’s close. Here is what I am going with in terms of the S&P 500’s reaction function to various election outcomes with probabilities we are assigning.
Trump w/ Republican Sweep = 25% probability; S&P +3% Financials significantly outperform (GSFINREG Index); Domestic Cyclicals OVER Global Exporters; Consumer underperforms on tariffs (GS24TRFS Index) & inflation; S&P 500 higher (but caveat is need 10yr yield moving in-line or less than the expected +20bps). Nasdaq will be ok under Trump, but will not lead, pace of rate move may lead to skinnier rally than expected. Republican Policy Pair (GSP24REP Index) the clear winner.
Trump w/ Divided Government = 30% probability; S&P +1.5% Event risk out of the way and lower 10yr yield will trump (no pun intended) the negative on fiscal, but it likely means the stock market’s rally is short-lived. Tariffs and de-regulation (GSXUDREG Index) still happen, more fiscal becomes quite difficult but long-term rates likely decline to reflect less fiscal. Bottom line: better for gross risk but less beneficial for nets.
Harris w/ Democratic Sweep = 5% probability; S&P -3% A Democratic Sweep opens up the possibility that corporate taxes could be raised from 21% to 28%, but this will be difficult with a very small majority as it was in 2020. Similarly, de-regulation theme loses momentum in a Harris Sweep outcome. The combination of this is risk-negative, but somewhat offset by event being out of the way and lower rates/weaker dollar. Dem Policy Pair (GSP24DEM Index) clear winner and oil exposed a loser (GSENOILB Index).
Harris w/ Divided Government = 40% probability; S&P -1.5% Secular Growth (GSXUSGRO Index) / Nasdaq / Renewables (GSCBDMRN Index) / China / Global Exporters ALL OUTPERFORM; Defensives OVER Cyclicals (Long GSXUDEFS Index vs GSXUCYCL Index); S&P’s knee jerk dip likely gets bought as lower rates, weaker dollar, and less volatility could lessen the sting of less deregulation and animal spirits associated with a Trump victory. Harris w/ Divided congress should benefit consensus crowded areas of the market (specifically the ones mentioned above).
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Patrick has been involved in the financial markets for well over a decade as a self-educated professional trader and money manager. Flitting between the roles of market commentator, analyst and mentor, Patrick has improved the technical skills and psychological stance of literally hundreds of traders – coaching them to become savvy market operators!