US markets make up around two-thirds of the world’s stock markets by value. So the US election on 5 November has global relevance for investors. How will political changes impact the values of equities, bonds, and other assets?

The result itself…

…is too close to call. Yes, there is some evidence of an emerging ‘Trump trade’, favouring small cap companies, crypto assets, and putting pressure on bonds.

But it really could go either way. And that means it is unwise to take a material position on the assumption of a particular candidate winning.

But perhaps more importantly, gridlock at the government level is a likely result, whichever candidate is elected president – or if there’s a disputed result.

Right now for example while the Democrats have a Senate majority, the Republicans are ahead in the House of Representatives. For many investors, gridlock in Congress has its benefits.  It limits the more radical ambitions of either party because new laws are hard to pass. That produces a degree of stability.

Don’t confuse politics with real economy

That said, there’s a decent chance of some fireworks in US politics in the coming weeks. Events may not be settled on 5 November – they weren’t last time.  But don’t confuse politics with real economy.  Yes, the two are linked, as we’ll explain below.

Yet fundamentally as an investor, you’re buying a piece of the future cashflows of a company. And the world’s companies will continue to trade on 6 November and after as they always have.  The big investor news from 2024 so far is the largely successful taming of inflation without causing a deep recession in major markets. And broader optimism based on a resilient US economy and employment market is also providing a boost to markets right now.

In fact, election years tend to be good for the stock market.  First Trust analysis going back to 1928 shows the US S&P 500 [pdf] index produced a positive result in 19 out of 23 presidential election years. (That’s 83% of presidential election years, compared to 74% of years overall). This time looks to be no different.

Some sectors will benefit depending on the result

It’s still the case that certain parts of the global economy will do better or worse depending on the winner of the US presidential election. There are risk assets that are poised to do well in either case.

The oil and gas sector, for example, would likely face a more benign environment under Trump, whereas Harris would likely be more supportive of investment into renewables, such as the solar boom that has turned Texas into the nation’s largest state for generating solar and wind energy.

Each candidate is also associated with some specific risks. For example, there are negative investor implications for trade policy and protectionism, immigration and inflation under Trump. Under a Harris presidency, corporation tax is likely to rise and monopolistic practices of certain highly valued tech groups could come under scrutiny.

What should you do?

The US presidential election is too too-close-to-call.  That makes radical re-positioning your portfolio for any single result unwise.  Nor does it seem prudent to reduce US exposure ahead of the vote.  If anything, it’s likely uncertainly will reduce post-election, and that should benefit US markets as the political landscape becomes clearer.

Instead, as we approach election day, investors should:

Expect volatility. In particular, trading close to the election itself and its immediate aftermath is likely to involve bigger than usual fluctuations. If you’re implementing a long-term plan, it’ll be better to avoid trading in this period.

Maintain balance in your portfolio. Yes, there will be winners and losers – but it’s not possible to identify them with certainty now, and in fact they will take time to emerge. To take one counter-intuitive example, oil and gas shares have performed very strongly during the Biden administration.

Hold your nerve. Don’t make knee-jerk decisions.  There’s danger in missing out on the uptick once uncertainty reduces.  For almost all investors, stick to a longer-term investment plan will deliver the best financial results.