Countdown to Election Day: Economic Indicators and Asset Classes Signal Likely Outcomes

Ahead of the election, several economic indicators and data points can signal potential political outcomes while reflecting voter priorities on economic issues. Additionally, asset classes and stock market trends typically react as Election Day approaches and reprice quickly once results are announced.

Author: Revc, Golden Finance

Introduction

The U.S. presidential election is scheduled for November 5, 2024 (Eastern Time). As the year's biggest political and economic event, this election has drawn the attention of global financial markets. On November 2, Vice President Kamala Harris and former President Donald Trump both held campaign events in North Carolina. Their planes were parked just a few meters apart at the airport, underscoring the razor-thin nature of the race. The fierce competition between Trump and Harris has also driven volatility across asset classes — a dynamic widely referred to as the "Trump trade."

The U.S. election results are not expected to be called on election night or even the following day. Looking back at the previous election, because vote margins in battleground states were so tight, some states took several days to count ballots, and a final result wasn't confirmed until November 7. This time around, the polling gap between Trump and Harris has narrowed, which could extend the ballot-counting process in key swing states even further.

Ahead of the election, several economic indicators and data points can signal potential political outcomes, offering a window into voter concerns about the economy. Moreover, asset classes and stock market trends typically react as the election draws near and reprice quickly once results are announced.

Overview of Key Indicators and Asset Movements

1. Key Economic Indicators Heading Into the Election

• Consumer Confidence Index (CCI): This index measures how optimistic consumers feel about the economy. Higher consumer confidence tends to favor the incumbent party, as it reflects public satisfaction with economic conditions. Lower confidence can signal dissatisfaction and benefit the challenger.

As of September 2024, the U.S. Consumer Confidence Index (CCI) fell to 98.7 (with 1985 as the baseline of 100), down from August's revised reading of 105.6. The drop reflects consumer concerns about the labor market, even though employment remains stable — unemployment is low, layoffs are minimal, and wages are elevated.

Analysts note that the decline may reflect worries about fewer job opportunities and slowing wage growth, even as overall economic conditions are still considered solid. On balance, despite the dip in CCI, consumers have maintained relatively optimistic expectations about the economy's long-term trajectory, suggesting that while some near-term anxiety exists, long-term confidence hasn't been seriously shaken.

• Unemployment Rate: A low unemployment rate favors the incumbent party as a sign of economic stability, while a rising rate can hurt the party in power.

As of October 2024, the U.S. unemployment rate stood at 4.1%. That figure has been stable relative to prior months, indicating that despite temporary disruptions from external factors like hurricanes and strikes, the labor market has held up. This reflects the resilience of economic policy in the face of multiple headwinds.

• GDP Growth (Gross Domestic Product): Strong GDP growth favors the incumbent party as a sign of a growing economy. Slow or negative growth tends to raise voter concerns about economic policy and benefit the challenger.

U.S. GDP grew at an annualized rate of 2.8% in Q3 2024. That pace signals a stable but somewhat moderating economy — strong, but in a phase of cautious expansion. Even as the Federal Reserve raised rates in 2022 and 2023 to bring down inflation, consumers continued to be the primary engine of economic growth.

• Inflation Rate: Moderate inflation is generally tolerable, but elevated inflation heading into an election can push voters toward candidates promising economic reform.

The Federal Reserve's preferred inflation gauge — the Personal Consumption Expenditures (PCE) index — rose just 1.5% on an annualized basis last quarter, well below Q2's 2.5% reading and the lowest level in over four years. Core PCE inflation (excluding food and energy) came in at 2.2%, down from 2.8% in Q2.

Even though inflation has been brought under control, prices remain far above pre-pandemic levels, leaving many Americans frustrated — a challenge that cuts against both the Harris and Trump campaigns. Most economists argue that Trump's policies would likely push inflation higher, while Harris's approach is seen as more likely to keep inflation in check.

• Stock Market: A strong market typically favors the incumbent party, while a declining market can hurt their prospects. Benchmarks like the S&P 500 are frequently used as indicators: if markets rally in the months before the election, the incumbent party tends to have better odds of winning.

The S&P 500 has long been used as a predictive barometer for election outcomes. Positive momentum over the three months preceding an election has historically pointed to an incumbent-party victory. This pattern has held in 20 of the last 24 presidential elections, reflecting a strong correlation between economic sentiment as expressed through the S&P 500 and voter preferences. That said, the current AI sector bubble may be distorting the relationship between the data and the underlying indicators.

Heading into election week, the S&P 500 was up nearly 20% for the year — a reading that could be interpreted either as a market signal favorable to the incumbent or as a reflection of broad economic confidence.

Despite the strong year-to-date gains, the week before the election saw a noticeable pullback: the S&P 500 fell 1.37% and the NASDAQ dropped 1.5%. This may reflect last-minute investor anxiety or repositioning ahead of potential policy shifts following the election.

2. Assets and Stocks That Reflect Election Outcomes

• Bond Yields: Bond yields can quickly reprice in response to shifting expectations around fiscal policy. For example, if a candidate favoring increased spending wins, yields may rise on expectations of higher government borrowing. Conversely, if a fiscally conservative candidate prevails, yields may stabilize or fall.

U.S. bond yields — particularly the 10-year Treasury — saw significant movement throughout 2024. Ahead of November, yields trended higher, which can be interpreted as markets pricing in expectations of a post-election fiscal policy shift, especially given signals that Republicans may win — an outcome associated with fiscal policies that could