As the U.S. presidential race heats up, markets are preparing for their usual four-year cycle of increased anxiety and short-term declines. As we enter the final stretch of the campaign, we anticipate further volatility, as markets typically shun uncertainty, and every presidential election outcome carries many ‘known unknowns’.
This year, with both candidates neck-and-neck in the polls and unclear policy directions regarding taxation, fiscal largesse, and regulation, market uncertainty is particularly pronounced. Furthermore, with an increasingly polarised political environment and an already seasonally weak period for shares from October to November, the risk of short-term profit-taking rises.
Shoot first, ask questions later
Whilst the 2020 election brought with it unprecedented twists and turns, this election cycle has been unparalleled, with the Democrats changing candidates midstream, and two assassination attempts on former president, Donald Trump. Consequently, in periods of heightened uncertainty, markets often react swiftly and indiscriminately, preferring to ‘shoot first and ask questions later’—a hallmark of election-induced volatility.
However, despite this unpredictability, soon a winner will be crowned, the uncertainty will dissipate, and the markets will rally around the victor and look through to the new year.
Double trouble
Importantly, despite a multitude of areas where the Republicans and Democrats offer stark differences in their policy platforms, both are offering highly stimulative fiscal agendas, which pose upside risks to inflation and bond yields.
Therefore, irrespective of the ultimate outcome, we think that the risks of recurrent bouts of inflation remain elevated. To help you digest the more specific nuances between the candidates, we’ve summarised some of the key areas of divergence that may produce ripple effects across equity and fixed-income markets.
Highs, lows and must knows
Domestic policy: Despite being the incumbent Vice President, Kamala Harris is positioning herself as the ‘change candidate’, with big spending initiatives aimed at infrastructure (such as ‘clean energy’), education and health, which we expect to be positive for growth. Trump is similarly focused on job creation and economic growth – albeit with a concerted emphasis on deregulation – particularly within the finance and energy sectors. To summarise Trump’s energy policies, he’s vowed to “drill, baby, drill”, which would likely assist in bringing down energy prices and inflation.
Taxes: Unsurprisingly, Harris won’t be renewing Trump’s signature corporate tax cuts that were enacted when he was in office. This would raise the corporate tax rate from 21% to 28%, which would increase business costs and potentially impact US equity returns. Harris has likewise pledged to raise taxes on the wealthy. Conversely, Trump has vowed to retain his previous tax cuts and aims to reduce the corporate tax rate further to 15%. Naturally, this would boost earnings for US stocks and provide further tailwinds for the US market’s outperformance.
Tariffs: The Biden/Harris administration has attempted to defuse a political line of attack and retained most of Trump’s tariffs. Trump has subsequently sought to outflank Harris on this front and announced a sweeping increase in proposed tariffs. This could lead to higher prices for imported goods, which may again, stoke inflation. For both candidates, these tariff wars risk re-igniting inflation which would hamper returns across both equities and fixed-rate bonds.
Immigration: This is a hot-button political issue that polls highlight as a key vulnerability for the Democrats. Though Harris has recently hardened her stance, border security remains one of Trump’s signature issues that he’s running on, with immigration likely to be significantly curtailed under his tenure. This could lead to further tightness in the labour market and place upward pressure on wage inflation, which would be a negative for equities and fixed-rate bonds.
Naturally, this isn’t an exhaustive list of the two candidate’s policies and the potential market impacts, yet it sheds some light on the key areas of difference.
Tik-tock, market shock
Notwithstanding the history-making twists so far this election cycle, the reality is that once the dust settles and the election uncertainty fades, markets tend to perform well. This holistic view is best illustrated via the below graphic which demonstrates that a clear upwards trajectory is observed, regardless of the party affiliation of the incumbent president or whether an election is occurring.
Source: Bloomberg
Trump bump or Trump dump?
With headlines perpetually speculating on the market impact of Trump dethroning Harris, the media tends to overstate the influence that the US president has on financial markets. Recall the hysteria when Trump took office in January 2017 that a market crash was imminent? Or the claims in the lead-up to the 2020 election that a Biden presidency would derail the COVID-19 market recovery? With the benefit of hindsight, we can now appreciate how overhyped these fears were, with the market quickly consolidating around the winner.
Who said politics was boring?
Although we strongly advocate for a long-term perspective, we anticipate significant volatility as election day approaches. The hefty 0.50% rate cut by the US Fed during their September meeting, coupled with the usual seasonal market fluctuations and the predictable last-minute rhetoric from the candidates, all contribute to investor uncertainty.
It’s now more crucial than ever to keep a level-headed perspective and disregard the media clamour, encouraging more reasoned and controlled portfolio management choices. While these measures won't completely protect portfolios from short-term declines, managing emotions will enable you to rebalance during market downturns and capitalise on any mispricing. Ultimately, markets have weathered every election—just ensure that your portfolio does the same.
