After a relatively predictable election here in the UK, where Labour surprised only by its margin of victory, rather than the victory itself; the 2024 U.S. Presidential election is looking the most compelling for years. The era of being comfortable with whether a Democrat or a Republican President was residing in the Oval Office seems a long way distant. In 2016, a bombastic Donald Trump captured the Presidency and with that, threw out the comfort of the orthodoxy that US global supremacy, came with the assurance of either a centre-left, or centre-right leaning President, who stood by free trade, the rise of democracy and America’s role as global policeman. In 2020, as Joe Biden took the Presidency, Trump took to his lectern to call for the crowd to “walk down to the Capitol” in the January 6th riots. With this year’s election set for fireworks night here in the UK…just saying.
For much of the last 18 months, we’ve been rehearsing for another Trump v/s Biden showdown. As we all now know, history happens, and with one disastrous showing at the Presidential debate in June, Biden’s campaign collapsed, paving the way for Vice-President Kamala Harris to formally clinch the Democratic nomination at a reinvigorated Democratic National Convention in August. Since then, polls have shown an evaporating Trump lead giving way to a slow, but steady lead for Harris over Trump. At the time of writing, the polls don’t offer significant enough guide to suggest anything other than the election is too close to call, which will distil down to just a few tens of thousands of votes in a small number of swing states.
Three elections in one day
Elections this November are for the Presidency, about a third of the Senate and all seats in the House of Representatives. Control of all three by either Harris or Trump paves the way for a much more dynamic and impactful Presidency in terms of what can be achieved. Where there is more clarity in the election polling, is that pollsters don’t forecast this ‘clean sweep’ to be likely for either Trump or Harris. Most of the seats up for election in the Senate are for the Democrats to defend, making their slim current majority (that works in conjunction with a few independents) susceptible to a Republican win in just a small number of states. Polling currently suggests we are headed for a Republican controlled Senate and a Democratic controlled House of Representatives.
Equity Markets
Equity markets don’t like volatility or uncertainty and that comes as standard with Trump, whereas the perception of ‘safe-pair-of-hands’ Harris, implies more settled market conditions. History would suggest the election outcome makes remarkably little difference over the long-term to equity markets, which are far more influenced by the broader outlook of the economy and the strength of corporate earnings and profits. But history also suggests that in times when there is a split government, as polls suggest will be the case this time, equity market returns have been higher when a Democrat has been in the White House. We’d argue this is coincidental, not causal, even if Democrats like to take the credit.
History, however, didn’t always have Trump sitting as a candidate! The first Trump Presidency took markets on a volatile path. Trump may like to present himself as capitalism personified, but he is not the godsend for markets he’d like to imply. Erratic policymaking and hard-line trade policies upset markets on occasion during his Presidency. Expect the same again if elected.
Trade
Raising tariffs on, well, just about everyone and everything, is a key focus for the Trump campaign, touting a 60% tariff on Chinese goods and 10% on goods from the rest of the world. The current Biden administration has also been users of tariffs and there’s no sign that a Harris Presidency would suddenly become a strong advocate for free(er) trade.
Significantly doubling down with rising tariffs will be consequential on several levels. First, the American consumer is going to see higher prices if tariffs get implemented. Whilst some of the cost of this could be absorbed by companies keen to retain their US market share at the expense of profit, and some could be absorbed by a stronger US dollar, rising US consumer prices would most likely curtail the amount of interest rate cuts and underpin dollar strength. This, at least, in the near term anyway given the initial impact of rising prices, which over the longer term would give way to slowing trade and global growth. A one-sided world with US tariffs on the rise, will also weaken the outlook for economic growth in Europe, as well as Asia, but tariffs are a two-way game.
The Energy Transition
During the Biden Presidency, there has been a significant amount of fiscal stimulus in the United States directed towards increasing the renewable energy supply through packages such as Inflation Reduction Act (IRA). For whoever becomes President, the path to a cleaner energy transition is unlikely to change direction but is likely to change pace. The IRA directed $200bn towards the transition and this level of fiscal stimulus is unlikely to be repealed. It was both a key Democrat policy, plus a significant number of Republican-leaning and their states have benefitted from IRA investment for renewable energy projects.
Even for Democrats, the supportive tone for the clean transition has become more opaque. It was a platform for Harris in her attempt to get the Democratic nomination previously but is less centre piece today. Driving higher delivery in the energy transition for the same expenditure is likely to be a greater focus for Harris. Under Trump, the support for more fossil fuel extraction and energy production is loud and clear and for the transition to clean energy weak. Incentives will likely slow, perhaps with fewer for electric vehicles.
Geopolitics
Whilst tariffs would weaken global trade, they also threaten increased geopolitical risk. The US/China trade war was a feature of the first Trump Presidency. Now, with war in Ukraine and hostilities in the Middle East, a Trump Presidency is likely to increase instability in an already unsettled world. America’s allies are increasingly looking at the fabric of their security blanket and wondering whether the stitches will remain in place, so Trump repeating his argument that should other countries want to enjoy the security of American military power, then they need to pay for it, serves to undermine the solidity of existing security structures, such as NATO. The mitigation here is that Trump’s threats last time he held power, did prompt increasing amounts of defence spending by many members of the alliance.
Inflation
If the November election path does end with either Trump or Harris taking a clean sweep of Congress, then both will have greater leeway in implementing policy. Projections don’t show this to be the case and, in many ways, a split Congress with less ability to implement sweeping reform would be one that suits most investors just fine.
Whereas in 2016, a Trump Presidency was considered one that was likely to deliver more economic growth through a raft of tax cuts being one of the main platforms for his candidacy, today, the equivalent amounts of stimulus will be harder to deliver given the high level of fiscal deficits that the US has been running for some time. It is more likely that we would see a renewal in some existing tax cuts that were due to expire during this coming presidency in 2025 for either candidate. Trump would likely favour retaining the existing style of cuts that he implemented, helping higher earners, and reducing corporate taxes. Harris is anticipated to favour an increase in corporate taxes and expansions to child tax credit and housing tax incentives.
So, whilst the 2016 version of Trump was considered a boon for growth, the 2024 version of Trump, with a combination of tariffs, restricting migration and its cheap labour supply plus tax cut renewals, looks a more likely candidate for higher than currently forecast inflation. That goes hand in hand with the likelihood of the Federal Reserve needing to preserve interest rates at a higher level under a Trump Presidency than under a President Harris, which in turn is likely to turn Trump’s ire towards the Federal Reserve.
Threat to an independent Federal Reserve
Independent central banks have been one of the key contributors to maintaining the credibility of anchoring long-term inflation expectations to their set targets, even during the inflation spike of recent years. If a future threat to the independence of the Federal Reserve gains more credence, then that confidence will be thrown into doubt. Whilst you can agree or disagree with the timing and direction of interest rate policy, and we often have, maintaining the credibility of a central bank through its independence is sound policy. Whilst independence is assured under Harris, Trump likes to place himself at odds to the Federal Reserve and wants more influence over interest rates. In 2026, a new Fed Chair needs to be appointed by the President, under Senate approval, which represents an opportunity to threaten Fed business.
Bond Yields
And this all bubbles down to fixed income. In advance of this election, bond yields have already moved a long way in the last six months, as the Federal Reserve tackles the task of preserving jobs in a weakening economy. There may be less scope for interest rate cuts under President Trump, than President Harris, if inflation settled at a higher rate due to tariffs, but a more favourable corporate tax environment would help preserve company balance sheets too. Whilst the path of bond yields is likely lower under both candidates, the distance travelled to how low rates can go may be that little bit less.
Conclusion
Since 1900, there have only been 31 days when a US Presidential Election has taken place. With such a narrow frame of reference, filtering out cause and effect of future market returns looks fraught. Having a sense for the direction of travel for corporate earnings, the broader economic outlook, as well as an eye on the direction of central bank policy may give a better steer for equity market returns. That said, the prospect for more volatility and uncertainty under a Trump Presidency looks real, so the path of least resistance for markets is probably the combination of a split Congress and a President Harris.
We’ll see come November.
