Global investors were nervous as Americans went to the polls on Tuesday, ending a dramatic U.S. election cycle that has moved bonds, stocks and other assets in recent months and could further influence markets as results become clearer.

One of the most unusual elections in modern U.S. history could have very different consequences for tax and trade policy and American institutions, depending on whether Republican Donald Trump or Democrat Kamala Harris wins. .

The results could shake assets around the world and cause broad financial fallout, including the outlook for U.S. debt, the strength of the dollar and a host of industries that make up the backbone of American businesses.

With polls showing a deadlock between the former president and current vice president and control of the U.S. Congress also at stake, investors are wary of any unclear or contested results that could fuel volatility stemming from a persistent uncertainty about the political context.

As votes begin to be reported Tuesday evening, investors will turn their attention to tallies from a handful of bellwether counties across the country that could point to the first clues about the winner. But many of the battleground states that will decide the race may not see significant results until at least late at night.

“This is the most important election I’ve seen in my career,” said Mike Mullaney, director of global markets research at Boston Partners, who has worked in investment management for more than 40 years. .

“It’s going to be very divided, with some things happening under a Trump victory, and some things happening under a Harris victory,” Mullaney said.

The focus on the election follows a stock market rally that has propelled the S&P 500 to record highs in 2024 with a roughly 20% year-to-date rise, driven by a robust economy, strong earnings businesses and interest rate cuts from the Federal Reserve.

The S&P 500 was up 0.8% Tuesday morning, with several assets whose recent price swings linked to Trump’s standing in polls and betting markets gaining ground.

Several measures of traders’ demand for protection against excessive overnight price swings in the currency market rose to their highest levels since the November 2016 election.

BETTING ON THE MARKETS

Betting on the outcome of the election has played a role in market fluctuations. Traders pointed to Trump’s gains in polls and betting markets as a factor in determining which assets could be swayed by his promises to raise tariffs, cut taxes and ease regulations.

These so-called Trump deals include the fall of the Mexican peso, which could be hit by tariffs, wild swings in Trump Media and Technology Group shares and rallies in sectors that could benefit from looser regulation, like regional banks and Bitcoin.

Yields on Treasury bills – which move inversely to bond prices – have also risen as investors price in potentially higher inflation, another expected consequence of Trump’s policies.

Trump Media shares rose about 15% Tuesday morning, while bitcoin rose about 4% as betting markets leaned more in Trump’s favor.

“The market is being pulled and pushed in different directions here as investors try to price in a lot of unknowns when it comes to the election,” said Matt Miskin, co-chief investment strategist at John Hancock Investment Management. “In the next week, we will have certainty; either this reinforces this positioning, or there will be an upheaval.”

A Harris presidency, meanwhile, is expected to result in tougher regulations, increased support for clean energy and potentially higher taxes on corporations and wealthier individuals.

“BLUE WAVE” UNLIKELY VIEW

Trump and Harris would likely need their respective parties to take control of Congress in order to change tax rates. A so-called “blue wave,” where Harris wins and Democrats take control of both the House of Representatives and the Senate, however, is an outcome that most investors consider unlikely.

“If Harris wins… it is now highly likely that she will face a Republican-controlled Senate, which would leave most of her budget plans dead in the water,” analysts said on Friday. from Capital Economics in a note.

Historical data shows that stocks tend to perform well in late election years, regardless of which party wins, because investors appreciate the clarity of the political situation.

This year, however, some investors fear the result will be too close to call, increasing uncertainty for markets. Another worry is that the election will be contested, in a move similar to Trump’s efforts to overturn his loss to President Joe Biden in 2020.

Although recent precedents for contested elections are rare, investors remember 2000, when the race between George W. Bush and Al Gore was undecided for more than a month due to a vote recount in Florida. During this period, the S&P 500 index fell 5%, with sentiment also weighed down by concern over technology stocks and the economy as a whole.

Although the S&P 500 is only down about 2% from its record high, stocks have become more turbulent over the past week following reports of mixed earnings from large-cap technology companies and ‘increased anxiety about the elections. The Cboe Volatility Index, known as Wall Street’s fear gauge, rose above 20, after falling below 15 in late September.

A murky election “is a big problem because that’s what we had in 2000,” said Matt Maley, chief market strategist at Miller Tabak. “What will he do this time when so much is happening in the geopolitical arena?”