In 2016, when Trump unexpectedly defeated Hillary Clinton, it triggered a widely circulated anecdote. Billionaire investor Carl Icahn reportedly left the early morning victory party and placed a $1 billion bet in the stock market. Despite a drop in stocks during overnight trading, Icahn believed Trump's election would boost Wall Street. He was proven correct soon after.

Today, as Americans vote once again for two candidates with starkly different policy agendas, traders from Singapore to New York have new opportunities to make huge unexpected gains or suffer painful losses.

National polling indicates a close race, but betting markets have recently predicted a clear win for Trump and his tax cuts and high tariff agenda. Wall Street's gambling spirit is also active, with support for Trump boosting small-cap stocks, interest rate bets sensitive to inflation, and once-ridiculed cryptocurrencies. However, as recent polls show the race remains intensely competitive, this momentum has lost steam.

Of course, in recent years, from the Brexit referendum to the shock of the 2016 U.S. election, investors have often been misled by major votes. Therefore, if Harris wins on a platform that appears to be less of a variable for financial markets, the so-called Trump trade could further reverse.

For risk-loving bulls, regardless of who takes over the White House, a resilient U.S. economy and loose Fed policy are reasons to cheer. Meanwhile, companies like Citi say it remains to be seen whether asset prices sensitive to Trump will soar again if the billionaire businessman can return to the White House, given that related assets have already risen strongly before Tuesday's vote.

Another significant variable is the partisan composition of Congress, which will heavily influence the White House's legislative agenda, complicating investment strategies predicated on fiscal policy and trends in infrastructure and clean energy sectors.

Alex Chaloff, chief investment officer at Bernstein Private Wealth Management, said, "There are not just two possible outcomes; there are six possibilities, and what you see is just one of them," adding, "Everything is up in the air."

Meanwhile, a contentious election is a major uncertainty, and Jean Boivin of BlackRock Investment Institute warns that investors are not adequately prepared.

Following an unprecedentedly destructive election cycle in U.S. history, here are the assets to watch.

Stocks

U.S. stock markets usually see a strong rebound after an election when investors have a clearer interpretation of policy direction, but expectations for such a rebound are not high this time. Despite the benchmark S&P 500 index (SPX) falling last month, it has risen 20% year-to-date, driven by excitement in tech stocks that have kept market valuations high.

Citi's head of equity trading strategy, Stuart Kaiser, said options data indicates traders expect the index to fluctuate by 1.8% up or down on Wednesday. Individual stocks and sectors may experience the most volatility, as has been the case so far this election season.

Goldman Sachs tracks two indices related to investments associated with Democratic and Republican victories, and after a steady rise since late September, the basket of stocks associated with a Trump victory began to fade as October came to a close, while the basket associated with a Harris victory showed strong momentum.

"Given the policy differences between the two candidates, this will be one of the easiest election outcomes to invest in ever," said David Wagner, portfolio manager at Aptus Capital Advisors. "Even if the U.S. stock market does not see much volatility at the index level post-election, various sectors and industries within the S&P 500 may experience significant fluctuations."

Banks and healthcare companies, both of which are heavily regulated industries, face the risk of stricter scrutiny during Harris's administration. If she wins, U.S. regulators may advance terms of an international banking agreement, which could increase capital requirements for companies like Bank of America, Goldman Sachs, Citigroup, Wells Fargo, and JPMorgan by 9%, according to plans announced by the Fed last month. If Trump wins, this effort may be delayed and softened significantly.

According to Bloomberg Intelligence, if the enhanced subsidies under the Affordable Care Act expire at the end of next year without extension, health insurance companies like Centene and UnitedHealth are projected to face a $25 billion revenue drop by 2026. Under Harris's leadership, these subsidies may be extended, while Trump had once promised to repeal the law. Pharmaceutical companies may also face increased regulatory pressure from a Harris administration, as she proposed capping out-of-pocket costs for prescription drugs at $2,000 per year.

Elsewhere, if Lina Khan, who focuses on antitrust, continues to serve as chair of the Federal Trade Commission, transactions under Harris's leadership may face challenges. The concentration of large tech companies may continue to be scrutinized.

The Democrats' active stance on clean energy means that a Harris victory would be good news for companies in the industry, including electric vehicle manufacturers like Rivian Automotive Inc. and Lucid Group Inc., electric vehicle charging network operators ChargePoint Holdings Inc., Beam Global, Blink Charging Co., and battery manufacturers.

Stocks of solar companies such as First Solar Inc., Sunrun Inc., and Enphase Energy Inc. are expected to perform better under Harris's leadership. Meanwhile, Trump has stated that he will end the Biden administration's electric vehicle policies on his "first day" in office.

However, regardless of the election outcome, Tesla may ultimately emerge as a winner. Because Biden's (Inflation Reduction Act) will drive the entire electric vehicle ecosystem, a Harris victory would benefit the company. Meanwhile, CEO Musk's verbal support for Trump gives the impression that investors would interpret a Republican victory as a boon for his company.

Traditional energy companies are seen as beneficiaries of Trump 2.0, as he has vowed to lift restrictions on domestic oil production. Notable stocks include Baker Hughes, ExxonMobil, ConocoPhillips, Occidental Petroleum, Williams, Halliburton, Devon Energy, and Chevron.

Another clear beneficiary of Trump is: the former president's social media company, Trump Media & Technology Group.

Tariffs have been one of the most discussed policies during the campaign. Bloomberg Intelligence estimates that regardless of which candidate is elected president, there is a 70% chance of imposing tariffs. However, under Trump, who calls himself a "tariff man," the risks are likely to be higher. Companies to watch include athletic apparel makers Nike and Adidas, both of which source a majority of their shoe products from China, as well as Lululemon Athletica Inc. and Allbirds Inc., the latter being known for its supply chain from Vietnam.

Given Trump's hardline protectionist stance, small-cap stocks that focus mainly on domestic business will benefit more from his victory.

"Investors expect that, apart from a significant Republican victory, large-cap stocks will lead under all election outcomes. In the case of a Republican sweep of the White House and Congress, investors believe small-cap stocks will lead," wrote Dennis DeBusschere, co-founder and chief market strategist of 22V Research, in a recent report to clients.

Bonds

Wall Street's recent track record in predicting interest rates and economic trends has been mixed. This has not stopped a group of financial speculators from going all-in on inflation trades in recent weeks, as betting markets indicate a significant rise in Trump's chances of winning.

In this view, a significant Republican victory is seen as a clear threat to bond buyers. In such a scenario, Trump would advance his tax cuts and tariff plans, expand the fiscal deficit, and reignite inflation. For example, JPMorgan's strategists noted that such an outcome would elevate 10-year U.S. Treasury yields under otherwise equal conditions.

"The market's biggest concern is the 'red wave' and a lack of checks and balances," said John Flahive, head of fixed income at BNY Mellon Wealth Management.

On the other hand, a Harris victory in a split Congress could trigger a relief rally in bonds, as it increases the likelihood of political gridlock that could control government spending.

What happens in other scenarios is almost controversial. JPMorgan strategists expect a significant Democratic victory to lead to more government spending, pushing up U.S. Treasury yields. On the other hand, RBC Capital states that this situation would be most favorable for bonds, as it would result in corporate tax increases, exacerbate a "less business-friendly" environment, and weaken risk appetite.

What makes this analysis tricky is that investors have almost no way of knowing how much of Trump's potential victory has already been priced into the bond market.

Of course, since the Fed's rate cut in September, 10-year Treasury yields have soared by more than half a percentage point to 4.3%. However, although the sharp rise in Treasury yields occurred amid rising competition, it also coincided with a series of better-than-expected U.S. economic data releases, complicating expectations for significant future rate cuts by the Fed.

Bond investors—typically regarded as the smart money rather than aggressive stock traders—may be easily mistaken. If the recent bond crash (October of this year being the worst in two years) was primarily driven by strong economic data, there could be further downside potential in the event of a Trump victory.

Another key indicator to watch is the so-called breakeven rate, which measures investors' inflation expectations. Trump's victory is widely seen as likely to boost inflation. The five-year breakeven inflation rate, which is the difference in yields between five-year inflation-linked bonds and U.S. Treasuries, has risen from below 1.9% in early September to 2.4%.

The five-year breakeven inflation rate rises.

Some market observers believe that U.S. Treasury yields could rise further, as neither candidate has shown any willingness to control runaway government debt. The bond sell-off in October has reignited discussions about the return of the "bond vigilantes," a term coined by Wall Street veteran Ed Yardeni in the 1980s to describe investors selling government debt in protest of fiscal profligacy.

Regardless of the outcome, one thing is certain: investors in the $28 trillion U.S. Treasury market expect the bond market to erupt in turmoil. The ICE BofA Move Index, which serves as a "fear gauge" for the bond market, is trading at twice the levels seen just days before the 2020 and 2016 elections.

The Move index has risen to a one-year high.

Currency

Wall Street strategists generally believe that Trump's tariff plan will support the dollar and harm currencies like the Mexican peso, at least in the short term.

At JPMorgan, analysts led by Meera Chandan estimate that a significant Republican victory, combined with tariffs and increased fiscal spending, will push the dollar up by 7% on a trade-weighted basis and weaken the euro against the dollar to near parity. On the other hand, JPMorgan states that a Harris victory could lead to a broad decline in the dollar in the short term and a rebound in the euro as the tariff threat diminishes.

Implied volatility in options pricing indicates that the Mexican peso, Chinese yuan, and euro are among the currencies most sensitive to the U.S. election. The current expectations for future price fluctuations of the peso over the coming week are at their highest level in over four years.

Cryptocurrency

At first glance, the narrative around cryptocurrency is simple: Bitcoin is expected to benefit from Trump's victory. He has pledged to treat cryptocurrency as a strategic reserve asset and appoint regulators friendly to the industry. However, a Harris victory may not necessarily have a negative impact on the sector.

In the short term, the optimism of cryptocurrency investors may have already been partially priced into the market. Bitcoin's trading price is now not far from its historic high of $73,798, and the exchange-traded funds (ETFs) tracking it have seen the largest inflows to date. Coupled with the fact that the election remains very tight, demand for hedging in the crypto options market has significantly increased.

In recent weeks, the implied volatility of short-term put options on Bitcoin (an indicator of options pricing) has surged significantly, as traders have paid higher prices for contracts that give them the right to sell Bitcoin at a fixed price.

Going further, options traders are expected to reap significant rewards in the future. According to data compiled by the largest cryptocurrency options exchange Deribit, for contracts expiring in March, the largest open interest is concentrated around strike prices of $100,000 and $110,000. This type of positioning may reflect the fact that while Trump has firmly established himself as a supporter of cryptocurrency, Harris has also indicated that she would not inherit the Biden administration's aggressive crackdown on the industry.

"Regardless of who the next government is, there will be a very different approach to cryptocurrency regulation, which has been the biggest obstacle before," said Chris Rhine, head of liquidity strategies at Galaxy Digital.

Article reposted from: Jin Shi Data