How Tonight’s Harris-Trump Debate Could Affect the Stock Market

Investors turned their attention to Philadelphia on Tuesday afternoon, as Vice President Kamala Harris and former President Donald Trump prepared on Tuesday to square off in their first presidential debate ahead of November’s election. 

The two are expected to spar on such issues as inflation, trade policy, taxes, and student loan debt. The debate, hosted by ABC, and will air and stream starting at 9 p.m. ET. 

How Could Tuesday’s Debate Impact Markets?

Tuesday’s debate may not bring new policy proposals, but it will give investors a fresh opportunity to assess how different the race is now that Harris has replaced President Biden atop the Democratic ticket.

June’s debate between Trump and President Biden, then the presumptive Democratic nominee, completely reshaped the race after Biden’s performance amplified calls for him to suspend his re-election campaign.

The resultant uncertainty was evident on Wall Street the next day. Stocks—including shares of Trump Media and Technology Group (DJT), owner of Trump’s social media platform Truth Social—rose toward record highs as markets digested Trump’s victory and an inflation report that showed price pressures abating. Both DJT and the S&P 500, however, gave up their early gains to close in the red. 

Tuesday’s debate may not generate the same drama. Still, market watchers will no doubt be sensitive to each candidate’s performance and how it affects their chances of winning in November. 

How Will the Election Results Affect Markets?

While there’s more to stock performance than who’s in the White House, historical evidence suggest that one-party rule in Washington is not optimal for markets. 

Historically, the S&P 500 has performed best with a Democrat in the White House, Democrats controlling the Senate, and Republicans controlling the House of Representatives, according to an analysis by Comerica Wealth Management. Under that configuration, the S&P 500 has returned an average of 15.7% a year.

The next-best performing configuration (average return of 13.7%) is the inverse: Republican control of the White House and Senate, and Democrats running the House. Granted, the S&P 500 has still performed relatively well when one party has helmed all three offices—with a 12.9% average return under Republicans and a 9% average return under Democrats. 

A divided Washington next year, in which the president must contend with at least one hostile legislative body, might revive debates about the debt ceiling, adding another element of uncertainty to markets.

The makeup of Congress next year will also likely determine what provisions of Trump’s Tax Cuts and Jobs Act (TCJA) will be extended past 2025. The Congressional Budget Office has estimated making the TCJA’s expiring provisions permanent—as Trump has proposed—would cost about $4 trillion over the next decade. Trump’s other tax proposals are generally considered business-friendly, but though economists generally believe his proposed tariffs would hurt multinational corporations. 

Democrats have proposed letting most of the TCJA expire while raising the tax rate on wealthy individuals and corporations. Comerica analysts note, however, that the market has not begun to price in higher corporate taxes, possibly reflecting Wall Street’s perception that such a plan faces steep odds without a Democratic sweep.

Can the Market Predict the Election?

There is, as Comerica’s analysts indicate, a correlation between stock returns and the outcome of presidential elections. The relationship is clearest when looking at the performance of stocks in the three months leading up to an election, which has lately been a reliable predictor of how America votes. 

The S&P 500’s performance from August to October has correctly predicted each presidential election since 1984. When the index declined in that period, the incumbent’s party lost the White House, and vice versa.

There are some plausible explanations for this phenomenon. First, equity performance tends to reflect sentiment, and a buoyant market likely indicates Wall Street—and voters—feel pretty good about the economy. Conversely, declining stocks reflect either a real deterioration in the economy’s health or widespread pessimism. 

Alternatively, stock performance and election results may be correlated because of the uncertainty generated by elections that appear likely to put a new party in power. Uncertainty encourages caution on Wall Street, subsequently weighing on stocks.