Investors around the world were on edge as Americans headed to the polls on Tuesday, drawing to a close a dramatic U.S. election cycle that has rippled through bonds, stocks and other assets in recent months and could further sway markets as the results become clearer.

This U.S. election cycle is one of the most unusual in history, and its results could have very different impacts on tax and trade policy and the American system depending on whether Republican Trump or Democrat Harris wins.

The election results could shake up global assets and lead to broad financial consequences, including for the outlook for U.S. debt, the dollar and a range of industries that form the backbone of American business.

As polls show a fierce competition between the former president and the current vice president, and control of the U.S. Congress remains undecided, investors are concerned about any unclear or disputed results, as any sustained political uncertainty could exacerbate market volatility.

As voting results begin to be announced Tuesday night, investors will focus on the counting results from several key counties across the U.S., which may provide early clues as to who will win. However, many swing states that will decide the election outcome may not produce meaningful results until late at night. Mike Mullaney, global market research director at Boston Partners, which has worked in the investment management industry for over 40 years, said, "This is the most important election I have seen in my career, the results will show significant divides; if Trump wins, certain things will happen, and if Harris wins, other things will occur."

Driven by a strong economy, robust corporate profits, and the Federal Reserve's interest rate cuts, the S&P 500 reached an all-time high in 2024, rising about 20%.

On Tuesday, several indicators measuring traders' demand for safe havens amid significant volatility in overnight currency market prices soared to their highest levels since the November 2016 election.

Bets driving the market

Nevertheless, the bets on the election results have influenced the market to some extent. Traders pointed out that Trump's rise in polls and betting markets is a factor driving asset movements, which may be affected by his commitments to raise tariffs, cut taxes, and deregulate.

These so-called "Trump trades" include a plunge in the Mexican peso (possibly hit by tariff shocks), significant volatility in Trump Media and Technology Group stocks, and rises in industries (like regional banks) that may benefit from deregulation.

U.S. Treasury yields (which move inversely to bond prices) have also risen as investors price in potential inflation, which is another expected outcome of Trump returning to the White House.

However, after Harris surpassed Trump in a closely watched Iowa poll, many of these "Trump trades" were at least partially reversed on Monday, as investors remained vigilant about the market's reaction to the election results to guard against further volatility.

Matt Miskin, co-chief investment strategist at John Hancock Investment Management, said, "The market is being pulled and pushed in different directions as investors try to digest the many unknowns related to the election. In about a week, we will have a clear answer, either reinforcing this positioning or a major reshuffling will occur."

Meanwhile, it is expected that Harris will implement stricter regulatory measures, support clean energy more, and possibly impose higher taxes on corporations and wealthy individuals.

"Blue wave" is considered unlikely.

Both Trump and Harris need their respective parties to win control of Congress in order to change tax rates. However, most investors believe that the so-called "blue wave," where Harris wins and the Democrats gain control of both the House and Senate, is unlikely to occur.

Analysts at Capital Economics stated in a report last Friday, "If Harris really wins... she is likely to face a Republican-controlled Senate, which would stifle most of her fiscal plans."

Historical data shows that regardless of which party wins, stocks tend to perform well by the end of election years, as investors feel reassured by the clarity of the political situation.

However, this year, some investors are concerned that the election results are too close, increasing market uncertainty. Another concern is that the election results will be contested, similar to what happened in 2020.

Despite the recent rarity of challenges to election results, investors still remember the events of 2000, when the competition between Bush and Gore remained unresolved for more than a month after a recount in Florida. During this period, the S&P 500 fell by 5%, as anxiety over tech stocks and the overall economy heightened market sentiment.

Although the S&P 500 is only about 2.5% below its all-time high, the stock market has seen increased volatility over the past week amid mixed earnings reports from large tech companies and heightened anxiety over the election. The Chicago Board Options Exchange Volatility Index, which measures Wall Street's fear, has risen to about 22 points, having previously fallen below 15 points in late September.

Matt Maley, chief market strategist at Miller Tabak, stated, "The uncertainty of the election results is a big issue, as this is something we encountered in 2000, but the difference is that so much is happening on the geopolitical stage today, what impact will this uncertainty of election results have?"

Article reposted from: Jin Shi Data