How did the markets respond to the U.S. presidential debate?

Markets had a clear view on who they thought won Tuesday night’s debate.

Vice President Harris saw a seven-point shift in her favor from betting odds after the 90-minute debate against former President Trump. While the race is still viewed as a toss-up, markets moved toward a greater probability of a Harris victory.

While elections may not have much of an impact on the broad markets, there are some segments of the market that are more sensitive to political outcomes. Investors generally think a Trump victory would be negative for oil prices due to more production. They also believe a Harris victory would be better for companies supported by Biden-era bills, such as Inflation Reduction Act beneficiaries, and renewable energy and semiconductor companies (due to the CHIPS Act). As you can see in the chart below, Harris-aligned assets delivered strong performance the day after the debate.

Green economy stocks (+4.1%) and renewables (+4.0%) outperformed, as did oil (+2.1%) (lower odds of increased supply put upward pressure on prices). Semiconductors (+4.4%) also outperformed. While the CHIPS Act provides tailwinds for semis, demand for chips and other key components in the AI arms race is likely to increase no matter which political party is elected. Indeed, Nvidia (+16%) roared back after falling -14% last week. Its CEO touted strong demand for its new Blackwell chips. In fact, customers are “tense” over the competition to get the most chips, fastest.

Some tactical trading opportunities may exist around the election, but don’t let it derail your plans. Since 1950, there have been 18 presidential elections and 10 transitions in the White House between Democrats and Republicans. Over those 74 years, U.S. GDP growth has averaged a 3.2% annual pace, and the S&P 500 has compounded at 9.4% per year. For more on all things elections, check out our election hub.

For the week, equity markets are heading toward a higher close. The S&P 500 is up +3.3%, NASDAQ 100 is up +5.5%, and small caps are also taking part (Solactive 2000 +1.7%). Gold continues to shine. It made another new all-time this week.

After uninverting for the first time in 567 trading days last week, 2- and 10-year yields are trading close to where they started the week, which is near the lowest level in a year. Investors expect the Federal Reserve to lower its policy rate by 25 bps next week to kick off its easing cycle. Even though longer-term yields have fallen, we believe investors still have opportunity to move out of cash and into bonds. Here’s why. 

Have you missed it?

Two-year Treasuries have fallen nearly 60 bps so far this year, and the 10-year is at its lowest level in over a year. With yields in the high threes for both of those tenors, the yield component may not entice investors off the sideline, and some might think they missed the rally. We don’t think that’s true, particularly when we talk about the other areas in fixed income that still have meaningful yields to offer. Below, we list three reasons we don’t think you’ve missed the rally.

1. Municipal and investment grade yields are still attractive. The Investment Grade Index now yields just under 5% or the Municipal 1–15 Year Index at 5.1% on a tax-equivalent basis. Those are pretty solid yields, especially when compared to our 7.0% return estimate for U.S. large-cap equities from J.P. Morgan Asset Management’s 2024 Long-Term Capital Market Assumptions.

2. Supply is creating opportunities for buyers: Short-run excess supply has elevated municipal yields, which we think will fall around November. Year-to-date by the end of August, municipalities issued $344 billion of bonds—the most over the same period since 2008. Election risk, which was highlighted by the Harris/Trump Debate Tuesday, has investors paying attention to policy that could alter the Alternative Minimum Tax (AMT) calculation, the municipal bond tax exemption and the State and Local Tax (SALT) deduction, among many other initiatives. This is incentivizing municipalities to issue debt ahead of the election to avoid incremental volatility.

Municipals offer value: Right now, the Bloomberg Municipal Bond Index yields are above their long-term average—and outside of the inflationary sell-off and COVID, they haven’t been this high since 2013. 

Going forward, we expect tax-exempt net supply will be a building headwind. When we consider the expected municipal market discounting we anticipate in the fall, coupled with the view that absolute rates will drop over the Fed easing cycle, we conclude the next two months could offer an opportunity to buy municipal bonds.

3. Bonds can have your back if there is a recession. While not our base case, some investors have been concerned that a recession is on the horizon. If the growth slowdown is more pronounced than we expect, this means an even stronger return environment for bonds. In that environment, the Fed would need to embark on a more aggressive rate-cutting cycle to support the labor market, further driving up bond prices. In the last 12 Fed cutting cycles, core bonds have returned 17% on average. What’s more, if a recession occurred during those cutting cycles, core bonds returned 20% on average.

Regardless of the fixed income vehicle you choose, we think cash rates will be lower by the end of next week. Therefore, it’s time to consider exiting excess cash to extend duration. Municipal valuations suggest they may be an attractive destination for that cash, but core bonds also merit a place in investor portfolios.

If you’re wondering which allocation is right for you, your J.P. Morgan team is here to help.

The information presented is not intended to be making value judgments on the preferred outcome of any government decision or political election.

The ICE Brent Crude futures contract is a deliverable contract based on EFP delivery with an option to cash settle.

JPM IB Stock Analysts identified U.S. companies likely to benefit from Green/EV/Climate provisions of the Inflation Reduction Act. These companies are expected to benefit from the multi-year spending outlays within the bill. Constituents are heavily tilted toward industrials and utilities sectors, and liquid weighted on construction.

JPM IB basket of liquid basket of renewable energy and related stocks. Screened for hard-to-borrow names and M&A deal targets. Optimized for liquidity with a 4% weight cap.

JPM IB basket of semiconductor stocks that follows the iDex methodology. Quarterly rebalanced with a 2.0% cap-weighting, using a 90-day dollar notional trading estimate. Monthly, a takeover and borrow screen is applied. Levels shown under this ticker are indicative.

The Bloomberg U.S. Municipal Index covers the USD-denominated, long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds. (Future Ticker: I00730US)

JPMAM Long-Term Capital Market Assumptions

Given the complex risk-reward trade-offs involved, we advise clients to rely on judgment as well as quantitative optimization approaches in setting strategic allocations. Please note that all information shown is based on qualitative analysis. Exclusive reliance on the above is not advised. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. Note that these asset class and strategy assumptions are passive only—they do not consider the impact of active management. References to future returns are not promises or even estimates of actual returns a client portfolio may achieve. Assumptions, opinions and estimates are provided for illustrative purposes only. They should not be relied upon as recommendations to buy or sell securities. Forecasts of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable, but do not warrant its accuracy or completeness. This material has been prepared for information purposes only and is not intended to provide, and should not be relied on for, accounting, legal or tax advice. The outputs of the assumptions are provided for illustration/discussion purposes only and are subject to significant limitations.

“Expected” or “alpha” return estimates are subject to uncertainty and error. For example, changes in the historical data from which it is estimated will result in different implications for asset class returns. Expected returns for each asset class are conditional on an economic scenario; actual returns in the event the scenario comes to pass could be higher or lower, as they have been in the past, so an investor should not expect to achieve returns similar to the outputs shown herein. References to future returns for either asset allocation strategies or asset classes are not promises of actual returns a client portfolio may achieve. Because of the inherent limitations of all models, potential investors should not rely exclusively on the model when making a decision. The model cannot account for the impact that economic, market and other factors may have on the implementation and ongoing management of an actual investment portfolio. Unlike actual portfolio outcomes, the model outcomes do not reflect actual trading, liquidity constraints, fees, expenses, taxes and other factors that could impact the future returns. The model assumptions are passive only—they do not consider the impact of active management. A manager’s ability to achieve similar outcomes is subject to risk factors over which the manager may have no or limited control.

The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results.