Wells Fargo analysts anticipate a “sell the news” reaction in the stock market following the U.S. presidential election on November 5th, regardless of the outcome.
In a recent report, the bank’s strategists highlighted the S&P 500’s recent rally, which they consider unusual compared to past election cycles. They describe the current market as having an “unattractive near-term risk/reward” balance.
“The S&P 500 has gained 3% in the last month and 4.4% over the past two months. Historically, we’ve seen stock prices decline leading up to Election Day, with sectors showing more risk averse behavior,” the report noted.
They also mentioned that this early rally might be the market trying to anticipate a post-election recovery.
Wells Fargo outlined different scenarios that could lead to this “sell the news” reaction. For instance, if the election results are contested, similar to the 2000 Bush Gore scenario, the S&P 500 could drop by 2-5% within days, with deeper declines possible if uncertainty continues.
The report recalled how the S&P 500 lost around 8% by the end of November 2000 during the disputed election between Bush and Gore.
In another scenario, a significant win for the Republican Party could cause market headwinds. According to the bank’s strategists, this outcome may encourage Trump to push for more aggressive fiscal policies and tariffs, potentially increasing capital costs and negatively impacting stock prices.
Furthermore, rising interest rates may worsen the situation for equities. The yield on the 10-year U.S. Treasury has already risen by nearly 20 basis points in the past week. Analysts warned that another rate hike could push the S&P 500 down to its 50-day moving average, representing a 3% decline.
On the flip side, a weakening in Trump’s re-election prospects or a surprise win by Kamala Harris could also affect the market. Wells Fargo noted that the S&P 500 dropped by 2-3% when Trump’s re-election odds fell in July.
