Investing.com -- Wells Fargo (NYSE:WFC) strategists expect a "sell-the-news" reaction in the equity market, irrespective of the outcome of the upcoming U.S. presidential election on November 5th.
In a Tuesday note, the investment bank said the S&P 500's rally ahead of the election is a departure from historical trends, creating what they believe is an “unattractive near-term risk/reward” profile.
“The SPX is +3% in the past month and +4.4% in the past two months. Over the last six presidential elections, we have seen equities trade lower into Election Day and sector returns reflecting risk-off,” Wells Fargo strategists noted.
“One could argue the market is front running the typical post-election rally,” they added.
The firm outlines several potential scenarios that could drive this "sell-the-news" reaction.
In the event of a contested election, such as the Bush-Gore scenario in 2000, the S&P 500 could slump 2-5% in just one to three days, strategists note, with more significant declines possible as uncertainty lingers.
"Recall the SPX fell ~8% into month-end during the contested Bush-Gore Nov 2000 election," the report highlights.
If a "red wave" scenario materializes, implying a significant victory for the Republican Party, the market may face further headwinds. Wells Fargo suggests that Trump would likely view such a result as a mandate for more aggressive fiscal policies and tariffs, which could drive up the cost of capital and push equities lower.
Moreover, rising interest rates could exacerbate the equities market outlook. The 10-year U.S. Treasury yield has already climbed nearly 20 basis points in the last week, and strategists caution that "another bump in rates would begin to push the SPX back to its 50-DMA (~5700), a roughly 3% slide."
On the other hand, a weakening of Trump’s re-election chances or an unexpected victory by Kamala Harris could also weigh on the market. Wells Fargo points out that the S&P 500 fell by 2-3% when Trump’s odds of re-election dropped in July.