Quick Thoughts: 2024 US election—implications for investors

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

Key takeaways:

• The US presidential election is often seen as decisive for the economy and overall investor portfolios. Historically, we found no evidence that either Republican or Democrat administrations have influenced how the markets overall have performed. 
• Where US political parties differ is on policies with sector impacts, above all for energy and pharmaceuticals. That is worth watching closely.
• The US election outcome remains in doubt for the presidency as well as for the Senate and House majorities. It is therefore too early for investors to make significant adjustments to their portfolios.
   

The election’s implications for investors

Last week, US presidential candidates Donald Trump and Kamala Harris gave speeches outlining their respective economic agendas and priorities, and this week the Democratic convention took place in Chicago. But what was not said may be as important as what was. Below, we summarize the key components of each candidate’s economic proposals, other key issues that are likely to be on the winner’s 2025 agenda, and the broad implications for investors.

Harris economics

We begin with Harris insofar as media attention has shifted to her campaign during the week of the Democratic National Convention and because polls show that she has closed the gap on Trump’s early summer lead over then-candidate President Biden.

It is worth noting at the outset that Harris is a trained lawyer, a former prosecutor, a former senator, and the sitting US vice president. In none of those roles has Harris developed a clear track record or narrative about her views on the economy. Accordingly, voters as well as investors are only just now discovering how Harris views the economic landscape, its challenges and her policy solutions. That learning process is likely to evolve in the runup to the election and, should she win the presidency, during the transition and into her term.

A first implication, therefore, of “Harris Economics” is that it will take time for investors to discern her priorities and comprehend the implications for their portfolios.

That said, in last week’s economics speech and again at the convention, Harris adopted a tactic common to her opponent, and one employed by most politicians these days, namely, to eschew over-arching economic ideology in favor of pragmatic proposals designed to solve specific problems.

For example, high grocery prices are to be tackled by cracking down on “price gouging.” Soaring house prices and the inability of lower-income and younger families to jump on the housing ladder will be addressed by government grants of up to US $25,000 per eligible recipient for down payments, as well as incentives to build more homes. To help address the rising costs of raising a family, Harris proposes a US$6,000 child tax credit for the first year after birth. Harris has also matched Donald Trump’s pledge to end federal taxation of tips.

Each of those proposals is targeted at specific voting groups, and therefore might be dismissed as more of a political ploy than genuine economic philosophy. But it is worth noting that the era in which the candidates, their platforms and their parties differed sharply along ideological economic lines is over. Neither candidate and neither major political party advocates the policies of yesteryear when, for example, Republicans could be counted on as favoring “free markets” and “free trade” while Democrats were labeled as “Keynesian.”

Instead, economic policy these days is “transactional,” aimed at voter groups and shorn of the grandiose language of the past. Kamala Harris, thus far, is no different.

Trump’s economics

Candidate Trump, in contrast to Harris, has a track record on economic policy, alongside many past speeches and comments. Accordingly, his policies are better known and his plans, should he return to the White House, are better understood. It is also likely that if Trump were to win the presidency, the Republicans would carry the Senate and likely the House, giving Trump more power to implement his policies.

Trump’s signature policies from his first term were tax cuts (chiefly a reduction in corporate income taxes), lighter-touch regulation—above all for the fossil fuel industry—and tariffs. Nothing in his remarks thus far in the 2024 campaign suggest that those pillars will not be in place during a second Trump term.

Trump has, however, signaled his willingness to consider other economic policy initiatives. For example, he has floated the idea of ending taxation of social security benefits. He has also proposed new, across-the-board tariffs as well as greater deportation of undocumented migrants. Trump’s policies could increase costs—and therefore inflation—but might also boost domestic output, growth and domestic wages.

Trump long ago, broke with traditional credos of the Republican Party, including advocacy for free trade. In that regard, and like Harris, Trump deploys economic policies to achieve specific political aims or to achieve specific economic outcomes.

2025 market realities

Campaigns are, of course, about pledges and slogans, which may or may not become policy for the winning candidate. That is not just politics—realities often impose themselves and change the direction of policy. The pandemic and the global financial crisis are recent examples of when policy was forced to adapt to unforeseen challenges.

Candidates may also prefer to avoid comments on items they will inevitably confront, should they win election. In 2025, one of the most important realities the winner will face is a large US federal budget deficit (US$1.7 trillion dollars or 6.3% of US gross domestic product in 2023¹). The other is the expiration of tax cuts passed in 2017.

Based on what has been said, it seems likely that candidate Trump favors a full extension of the Tax Cuts and Jobs Act of 2017. Yet he may face divided government, should the Democrats retain their majority in the Senate (unlikely) or regain it in the House of Representatives (quite possible).

If Harris becomes president and faces Republican majority opposition in Congress, most of the Trump 2017 tax cuts will expire at the end of 2025 unless legislative compromise can be found. However, in any compromise legislation, Harris appears to favor maintaining current tax levels for individuals earning less than US$400,000 and a hike in the corporate income tax rate from 21% to 28%.

Neither candidate has been willing to put forth credible plans to address medium-term deficit reduction.

Tariffs are another issue that may draw attention in 2025. As noted, Trump favors stiff tariffs on almost all imports from all countries. Harris has been quiet on the issue, though the Biden/Harris administration has kept in place Trump’s pre-existing tariffs.

Anti-trust is another issue likely to surface in the next presidency. Already, the US Justice Department has won an anti-trust case against Google (Alphabet). And while both candidates and political parties rely heavily on campaign finance from business, business leaders and heavyweight investors, the groundswell of populist unrest about high prices, unfair competition, unionization struggles and similar issues suggests that both candidates might selectively encourage anti-trust and legislation to strengthen anti-competition laws.

Lastly, climate change policy, and its potential impacts on investment and spending via subsidies, taxation or regulation will be on the table for either winning candidate. Trump has pledged to roll back many provisions in the Inflation Reduction Act, including subsidies for alternative energy and electric vehicle adoption. Harris, in contrast, would almost certainly keep those policies in place and would likely support new initiatives, albeit without yet having revealed what those fresh climate policies might look like.

Investment implications

We see two initial investment implications emerging from the preceding discussion.

First, it is too early to know how to invest based on the outcome, insofar as Harris’ entry into the race has made it a tightly contested election. Her presence may also help Democrats “down ballot,” meaning that even if Trump regains the presidency, he may face a divided government. Almost certainly, the odds of a Republican clean sweep of the presidency and both chambers of Congress have fallen. That makes it more difficult to know what kinds of policies will emerge in 2025.

Second, sweeping policy changes are unlikely, no matter who wins the election. This is not a contest between two competing economic ideologies. Each candidate’s proposals are targeted and incremental, not the kind of sea change that was the case when, for example, President Ronald Reagan and Federal Reserve Chair Paul Volcker arrived on stage in the early 1980s.

But other takeaways are also important, particularly at the sector level.

The fossil fuel and pharmaceutical industries will likely welcome a Trump presidency, as they could see less regulation (fossil fuels) or greater pricing freedom (pharma) under Trump. A Harris presidency will likely offer more support for renewable energy and housing (given her stated aim to boost residential construction via incentives).

Lastly, it is important to place in context what elections and politics means for long-term portfolio returns. Which is to say, not very much. US and global equity markets have thrived under Republican and Democratic control in Washington, as well as during periods of divided government. Setbacks, corrections, and bear markets are also not strangers to any constellation of power in the nation’s capital.

Occasionally, of course, the tide of history changes with a presidency, as arguably occurred when President Ronald Reagan came to power. Sometimes, presidents contribute to outcomes everyone can rejoice, such as deficit elimination, falling bond yields, and strong growth under President Bill Clinton.

But for various reasons, 2024 does not appear to be one of those moments. In our view, other issues voters care about may hinge on the outcome, but the state of the US economy and the broad performance of investor portfolios does not appear to be one of them.