There's a light at the end of the tunnel for Americans who've grown tired of political ads: Election day is next Tuesday.
The consequences of the election, especially with the outcome of the presidential race, could be significant for investors. But will those consequences be positive or negative? Here's what I predict will happen with the stock market if Donald Trump wins.
Image source: Getty Images.
Near-term bump
I'm fairly confident that some stocks will deliver nice gains if Trump is announced as the winner of the presidential race. For example, the former president frequently uses the phrase "drill, baby, drill" to express his support for increased domestic oil and gas production. Oil stocks such as Chevron and ExxonMobil will likely move higher with a Trump victory.
But what about the overall stock market? I expect the S&P 500(SNPINDEX: ^GSPC) will rise over the near term for three key reasons.
First, I suspect the stock market could enjoy a relief rally once the elections are over. This has been a highly contentious and very close battle for the White House. My hunch is the S&P 500 will move modestly higher regardless of whether Trump or Vice President Kamala Harris wins, as investors may buy stocks because they're glad the uncertainty has ended.
Second, there could be a "halo effect" of sorts from Trump's first presidential administration. The stock market performed well during his four years in office, with the S&P 500 soaring 70%. Some investors could base their expectations of a second Trump term on what they saw in his first term. To be fair, though, the S&P 500 has risen even more -- 75% so far -- during the Biden-Harris administration.
Third, Trump's proposals for further corporate tax cuts could inspire a degree of confidence in a continued bull market. If the GOP wins the Senate and House of Representatives, the anticipation of tax cuts could fuel expectations of greater corporate earnings over the next few years. As earnings go, so go stock prices (generally speaking).
Longer-term slump
However, I don't expect the stock market to skyrocket after a potential Trump victory, and I don't think any momentum will be sustained. Instead, I predict the S&P 500 will slump over the longer term with a second Trump administration.
The former president has proposed steep across-the-board tariffs of up to 20%. He has also called for more severe tariffs on China and vehicles made in Mexico. If Trump wins, I'd be surprised if he doesn't move forward with these plans -- regardless of whether or not the GOP controls Congress. Although the U.S. Constitution specifies that Congress has the authority to impose tariffs, previous legislation has given the president significant leeway to implement them.
UBS projects that U.S. stocks will fall roughly 10% in a "universal tariff scenario." The investment bank thinks that certain industries -- notably including retail and automakers -- would likely be hit harder than others.
I wouldn't be surprised, though, if the S&P 500 declines more than what UBS predicts. Many economists expect steep tariffs will cause inflation to resurge.
If this happens, the Federal Reserve could choose to increase interest rates again after the recent rate cuts. My concern is the combination of these factors would very likely result in a more pronounced and prolonged downward spiral for the stock market.
What should investors do?
Let's assume my prediction comes true. What should investors do to be prepared? I like Warren Buffett's strategy.
Look at Buffett's moves in recent quarters. He has built up a sizable cash stockpile for Berkshire Hathaway. However, he hasn't sold most of the stocks in Berkshire's portfolio. He has also continued buying some stocks that have attractive earnings prospects relative to their valuation.
Most importantly, he remains focused on the long term. I think this is a good approach for any investor, especially with many stocks priced at a premium.
What if my prediction about how the stock market will perform if Trump wins is wrong? Buffett's strategy is still a prudent one to follow. Investing for the long term, having ample cash to deploy when stocks are available at discounts, and being highly selective about which stocks you buy are smart things to do, regardless of who's in the White House.
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Keith Speights has positions in Berkshire Hathaway, Chevron, and ExxonMobil. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool has a disclosure policy.
