What Does the Year-End Election Hold for ETFs?

Former president Donald Trump's historic guilty verdict on falsifying documents could lead to increased market volatility, experts warn. However, this isn’t necessarily bad news for investors.

Ed Yardeni of Yardeni Research told Yahoo Finance's Catalysts that market sell-offs related to geopolitical or domestic political crises might present buying opportunities.

The latest muted market reaction to the Trump verdict might appear insignificant. However, this calm could be short-lived. Kim Wallace, senior managing director at 22V Research, predicts the VIX — the fear gauge index — will likely rise by mid-summer as the election picture becomes clearer.

Wall Street expects Trump still has a solid chance of winning the November election. A Trump victory could broadly boost the stock market as well as the US dollar. But his proposed tariffs and extended tax cuts might raise inflation and hurt U.S. government bonds.

The S&P 500 surged 68% through Trump’s first term, which was highlighted by tax cuts and infrastructure spending as well as a trade war with China and the onset of the COVID-19 pandemic. The benchmark index is up 38% so far under Biden, per Reuters.

Historical Market Reactions to Elections

Goldman Sachs strategists Dominic Wilson and Vickie Chang noted that past summer conventions have been significant market-moving events. The Republican National Convention is scheduled for Jul 15 in Milwaukee, followed by the Democratic National Convention in Chicago on Aug 19.

Market Preference for Candidates

LPL Financial's chief technical strategist, Adam Turnquist, also believes that the market favors a Trump victory, given the increased correlation between the S&P 500 and Trump's election chances.

Meanwhile, Carson Group's chief market strategist Ryan Detrick observed that historically, the S&P 500 has performed better with a Democratic president, averaging an 11.5% gain, compared to 7.1% under a Republican president.

Policy Implications for Markets

Major policy areas impacting the market include fiscal policy, tax regulations, and geopolitics. A Biden win could lead to further investments in clean energy, manufacturing, expanded healthcare, and lower prescription drug costs. This may favor ETFs like First Trust RBA Amer Industrial Renaissance ETF AIRR and Invesco Solar ETF TAN, while an ETF likeVanEck Pharmaceutical ETF PPH may come under pressure.

In contrast, Trump’s potential policies may include extending the 2017 tax cuts (which should boost broader market ETFs like iShares Core S&P Total US Stock Market ETF ITOT), boosting domestic energy production (which could favor Energy Select Sector SPDR Fund XLE), and imposing significant tariffs on imports (which could favor small-cap ETFs like Invesco S&P SmallCap Consumer Discretionary ETF PSCD).

Long-Term Investment Perspectives

Regardless of the election outcome, Berkshire Hathaway CEO Warren Buffett remains focused on long-term investing. His son, Howard G. Buffett, discussed this investment philosophy on Yahoo Finance's Opening Bid podcast, reflecting on his father's approach. One of Buffett’s favorite ETFs is Vanguard S&P 500 ETF VOO (read: More S&P 500 Rally in the Cards? ETFs to Gain).

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Energy Select Sector SPDR ETF (XLE): ETF Research Reports

Invesco Solar ETF (TAN): ETF Research Reports

Vanguard S&P 500 ETF (VOO): ETF Research Reports

VanEck Pharmaceutical ETF (PPH): ETF Research Reports

First Trust RBA American Industrial Renaissance ETF (AIRR): ETF Research Reports

Invesco S&P SmallCap Consumer Discretionary ETF (PSCD): ETF Research Reports

iShares Core S&P Total U.S. Stock Market ETF (ITOT): ETF Research Reports

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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