Kamala Harris and Donald Trump Will Not Be the Big Story on Election Night. The Stock Market Will be Focused on Something Else.

In less than three weeks, voters will head to the polls to elect the next U.S. president. Vice President Kamala Harris and former President Donald Trump have different policy agendas. Investors are undoubtedly trying to position their portfolios ahead of the election or pick stocks that could do well under the candidate they think will win. While the candidate who wins could certainly affect the trajectory of the market or individual stocks, the presidential race will not be the big story for investors on election night. Investors will be focused on something else. Let's take a look.

The legislative branch

Now, I don't want to downplay the impact a president can have on the stock market. For instance, Trump has talked about imposing tariffs on China and other foreign trade partners that the market hasn't reacted well to before. There has also been talk that Harris could tax unrealized capital gains, which I doubt the market would respond well to. On the other hand, Trump has proposed tax cuts, a classic Wall Street winner, and Harris has proposed several housing initiatives and tax credits that could boost the lower and middle classes, and therefore consumer spending.

But nothing can be accomplished without Congress, the body of government the president needs to pass most legislation. In the 21st century, Washington has been known for its constant state of gridlock. Both Republicans and Democrats are reluctant to pass bills and cede political victories to the opposing party. It seems like every year Congress is getting less and less productive.

Control over the U.S. House of Representatives and the U.S. Senate is expected to come down to the wire. The Republicans currently control the House but it's seen as a true coin flip on Election Day, according to The Cook Political Report. Twenty-six races could go either way, and others are competitive and could tip the balance in either direction.

Image source: Getty Images.

The Democrats have a slight majority in the Senate right now but most pollsters are projecting that the Republicans will be able to flip it on election night. Still, things are close enough that a surprise on election night is not entirely out of the question.

So what do investors want? Well, according to historical data, investors will be hoping for a split Congress, which has led to superior performance with an average return of 17% for the S&P 500. There is also some evidence that a divided government has been better for the economy.

Why does Wall Street prefer gridlock?

Contrary to popular belief, I'm sure many professional investors on Wall Street have opinionated political views and would also like to see change. But the best investing is done without emotion. A party that can impose sweeping legislation could pass big regulatory changes that could dramatically change the thesis for a stock or entire sector. Or Congress could raise corporate taxes or close loopholes for U.S. companies. That would cut into earnings.

But more than anything, big changes create uncertainty and the market does not do well under uncertainty. That's why stocks in China are so difficult to trade. There is constant uncertainty over the regulatory and political landscape and economic policies.

Most also believe Congress will act when not doing anything would be more detrimental to their political positions than passing a bill. For instance, many believe that even under a split Congress, lawmakers will eventually do something to address some of the financial issues with the Social Security program. Congress also manages to avoid government shutdowns most of the time -- there have been three since 2013.

I'm sure the correlation between performance and who controls Congress is not perfect and can be affected by what is happening in the world and markets at any given time. But the market will ultimately be paying close attention to Congressional races on election night to understand what big regulatory changes could be coming, or other changes that would materially impact the market.

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