The stock market initially welcomed this election victory: on Wednesday, the S&P 500 rose by 1.6 per cent. But the relief lasted only one day. On Thursday, the Nasdaq 100 fell by 6.4 per cent, its biggest one-day drop since March 2020. The semiconductor index even lost over 12 per cent. Over the course of the week, the S&P 500 fell by 2.7 per cent.

Protest vote or conviction?

However, it remains to be seen whether the Democrats have really convinced that many voters. Many Americans voted primarily against Trump. The war with Iran is unpopular and high inflation is affecting almost every household. In addition, many Republican voters stayed at home because Trump was trailing far behind in the polls. Part of the Democrats’ gains cannot be explained by voters they won over, but by Republican votes that were not cast.

Moreover, mid-term elections are almost always a referendum on the incumbent president. That says little about what lies ahead. Bill Clinton lost control of Congress in 1994 but was re-elected in 1996 nonetheless. Barack Obama suffered a heavy defeat in 2010 and won again two years later. A protest vote is a judgement on the past, but not a promise for the future.

Why 2028 is still up in the air

In 2028, Trump will no longer be on the ballot paper. With that, the main target of the protest vote will also disappear. Trump will become a ‘lame duck’, and Republican candidates will be able to distance themselves from his war and his import tariffs. At the same time, the Democrats will share responsibility from January onwards. Whoever controls Congress will also bear the blame if prices remain high. Moreover, the Democrats do not yet have a clear leader. The likelihood of a new Republican president is therefore greater than the results might suggest.

For investors, this open race is not a problem. Anyone who wants to be in the White House in 2029 will need a strong economy over the next two years. This reduces the likelihood of further escalation with Iran and increases the likelihood that import tariffs will be scaled back. A divided Washington also means fewer new policies, and therefore less uncertainty.

Politics as a trigger, not the cause

A Democratic governor in Texas, where around a third of new US data centres are being built, could introduce stricter regulations. But the real cause lies deeper. Hedge funds have been unwinding their positions for months. Their net leverage fell by 8 percentage points in a single week to 42 per cent. Wednesday’s rally was mainly used to offload even more risk. That is technical selling, not a new fundamental concern.

That wave of selling has significantly reduced valuations. The S&P 500’s price-to-earnings ratio has fallen by nearly a fifth this year, whilst earnings have risen sharply. Semiconductors were already trading 30 per cent below their June peak before the election. And 60 per cent of all US shares had already undergone a correction of at least 20 per cent. Beneath the surface, therefore, the market shake-out is already well advanced.

The economy tells a different story

In October, 165,000 jobs were added, whilst economists had expected 70,000. Unemployment fell to 4.1 per cent and wage growth cooled. Earnings per share for the S&P 500 grew by over 31 per cent in the third quarter. The major cloud companies still intend to invest around $1.6 trillion next year. These plans are driven by profits and competition, not the election calendar.

Interest rates are also helping. The Fed, under Kevin Warsh, remains hawkish, but the markets are now doing some of the work. A month ago, investors were still expecting three to four interest rate rises by the end of 2027; now they expect fewer than two. The price of oil fell by almost a fifth in three days. That’s often how it works: stock market turmoil leads to lower interest rates, and lower interest rates, in turn, provide a floor for the stock market these days.

Fear as an opportunity for the year-end rally

The fundamentals are stronger than the market sentiment. Valuations are lower, profits are growing rapidly and the central bank is easing its tightening stance. Following the four previous single-day falls of more than 6 per cent in the Nasdaq over the past fifteen years, the index rose by more than 25 per cent within three months on each occasion. A stock market correction is therefore not the same as an economic downturn.

The statistics are also on our side. In this century, the year-end rally has usually begun well before the Christmas period. In the six months following mid-term elections, major US shares have risen by an average of around 15 per cent. The third year of a presidential term is often the strongest year for the stock market. That is why there is a good chance that, following Thursday’s fall in share prices, the year-end rally began on Friday. Anyone who sees today’s panic as an opportunity to buy is likely to be on the right track.

More columns by Han Dieperink