investment insights
US election scenarios and investment implications
Key takeaways
- US primaries, when Republicans and Democrats select their presidential candidates, are likely to set up an historically rare repeat of 2020’s choice
- As significant will be the Congressional balance; if Mr Biden is re-elected, we see a high likelihood of a split Congress, and a possible clean sweep under a Republican White House
- Neither political party appears keen to tackle the US fiscal deficit, so debt fundamentals will not change. Where there are differences between candidates on tax, import tariffs, immigration, infrastructure ambitions and foreign policy, there is bi-partisan overlap over strategic competition with China
- Since late 2023, we have increased our strategic exposure to US assets and maintain our tactical overweights to US stocks, Treasuries and the USD. Typical election-year market volatility and an expected rise in risk premia should fade after the vote. The bond market impact depends on the Congress/White House split and implications for inflation and budget deficits. The dollar should be supported as uncertainty builds during the election campaign.
‘Super Tuesday,’ when many US states decide their presidential candidates, holds less suspense than usual. This year’s primaries held on 5 March add to the probability that 2024 will see an unusual re-match between the same candidates as 2020’s presidential election. We examine the policy implications for the US economy and markets.
A 5 November re-match between an incumbent and a former president would be a US electoral rarity. Historically, four presidential elections have seen repeat run-offs but only once, in 1892, has a former president won a non-consecutive second term. However, the possibility of a second Trump administration continues to grow. Last week’s primary votes and this week’s ‘Super Tuesday’ ballots leave Donald Trump as the only Republican candidate. Any likelihood that one of Mr Trump’s four criminal cases will result in a conviction before the election is diminishing after the Supreme Court this week ruled that he can run for president. For the Democrats there is no race to replace President Joe Biden, but with approval ratings below 40% and reactions within the party to the Israel-Hamas conflict, some consider him an electoral liability. At the Michigan state primaries, almost one-sixth of Democrats voted ‘uncommitted.’ Still, three-fifths of voters nationally have told pollsters that both candidates are too old. On election day, undecided or disillusioned voters who favour neither candidate in just six swing states (Arizona, Georgia, Michigan, Nevada, Pennsylvania and Wisconsin) will probably determine the result.
The balance in the legislative branches of the Senate and House of Representatives will be just as important for US policy from 2025. We see a high likelihood of a split Congress in the event of Mr Biden’s re-election, and a possible clean sweep under a win by Mr Trump. To win a majority in the House, the Democrats need to gain five seats in the 435-seat chamber. In the Senate the Democrats face a challenging race; to maintain their majority in the 100-member chamber, they cannot lose a seat.
Another fiscal cliff, taxes and tariffs
The first issue facing whoever takes office in January 2025 will be the US’s ‘fiscal cliff,’ or federal budget shortfall that regularly cripples the government over the country’s debt ceiling. Neither side of the political spectrum has shown any willingness to resolve the country’s deficit. If the Democrats win the presidency but Congress remains divided, a debt solution will undoubtedly run into delays and brinkmanship, undermining the chances of meaningful budget decisions. Nevertheless, whoever holds the presidency, the issue is not new; US debt fundamentals will remain unchanged along with the regular threat of a technical default. The debate does have short-term implications for the US’s credit rating, plus many tax credits for clean energy, production and investments that all fall under the Inflation Reduction Act (IRA), as well as the healthcare budget.
By the end of 2025, other deadlines loom. Under a second Biden administration, Mr Trump’s 2017 corporate tax cuts would likely expire, at least partially, while a Trump administration would probably extend them, and look to cut individual tax rates. Extending the IRA tax credits or the Trump tax-cuts would worsen current projections for debt and deficit. While this may generate some volatility, we view the event of a US default as very unlikely, given that the interest rate on US debt is likely to remain below the growth rate of the economy, and tax levels relative to GDP are the lowest among G7 countries.
The Trump campaign has also mooted a broad 10% tax on goods imports, and an additional 60% on Chinese imports. That carries the potential to further disrupt global trade and undermine US competitiveness. While most trade policy attention focusses on possible Trump policies, strategic competition with China is close to consensus among lawmakers, and the Biden administration has not removed the tariffs imposed by his predecessor.
At the foreign policy level there are very different views on further aid for Ukraine. The prospect of a second Trump administration has already catalysed conversations among other NATO members about radical reforms to increase defence spending at the prospect of the US returning to pre-1941 isolationism.
Immigration remains a partisan subject with implications for the US economy. Mr Trump has pledged to halt immigration and repatriate illegal immigrants. The danger for the US economy is that any reduction in labour supply threatens to tighten a job market that is already short of workers, putting upward pressure on inflation.
Asset class and sectoral implications
The US market’s continued outperformance argues in support of our December 2023 decision to increase our strategic exposure to US assets. Despite the possibility of higher stock market volatility in an election year, that should fade, and US equities deserve their core position in portfolios. Still, election years show no particular correlation with equity market performance, which tends to be positive, although they do often show some consolidation or build-up of risk premia ahead of a vote, and then rally in the aftermath.
At the sector level, a Biden win would likely mean status quo for energy policy. The same cannot be said for a Trump victory, which could entail potential cuts to planned government spending with implications for diversification towards alternative energy and technologies. On balance, we would expect a second Trump administration to be more positive for traditional energy firms and financial services if it displays a dose of deregulation. The healthcare sector tends to perform better in stable political environments, although we may see ongoing regulatory pressure to accompany broad agreement that healthcare costs should continue to fall. The technology sector appears rather indifferent about who is in the White House. One area of interest and potential difference is around regulation and how to balance anti-trust concerns with the potential transformational impact of artificial intelligence (AI). As AI’s promise continues to evolve and becomes monetised, the US election looks less relevant.
Some volatility will inevitably be priced into bond markets around the prospects for inflation and fiscal policy. Bonds tend to perform better when there is a split across Congress and the presidency, since that tends to discourage ambitious, debt-fuelled spending. From this perspective, the biggest impact would be from a Republican clean sweep, which could extend tariffs and tax cuts, and hence the US deficit, and in turn lead to higher interest rates and a steeper yield curve.
Currency markets not only provide a near real-time view on probable policy changes and their impact, but the asset class would be directly impacted by tariffs. We would expect the dollar to be supported in the run-up to the election as uncertainty builds and markets begin to hedge risks. In the event of a Republican victory, we would likely see dollar appreciation, as happened after the 2016 election. This time around, the potential for blanket 10% import tariffs could support the dollar against the currencies of countries with exposure to US demand, including Mexico, Canada, Switzerland, Taiwan and Thailand. The prospect of additional US import tariffs could also push China to weaken the yuan to maintain its export market competitiveness. On the flipside, the US dollar is now more overvalued than in 2016, and global growth and US monetary policy will likely matter more than politics in the second half of 2024.
Important information
This is a marketing communication issued by Bank Lombard Odier & Co Ltd (hereinafter “Lombard Odier”).
It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
Read more.
share.