Macro: Sandcastle economics
Invest wisely in Q3 2024: Discover SaxoStrats' insights on navigating a stable yet fragile global economy.
You can access both of our platforms from a single Saxo account.
Navigating US election scenarios: An investors guide and stock shortlists
US Election 10 minutes to read
Peter Garnry
Chief Investment Strategist
Summary: Investors should note that the US presidential election and Congressional elections on Tuesday, November 5 will impact the direction for US and global markets and the global economy for months and even years to come. It's worth considering how the different scenarios might impact your portfolio.
Why does the US election matter to investors?
The US presidential and Congressional elections on Tuesday, 5 November 2024 mark the most important event on the calendar for investors for months and years to come. One reason is of course that the US economy is still the world’s largest, and its equity market dominates all other markets at 65% of the total global equity value. Policy decisions made by the president and Congress after the election will shape financial markets and the global economy.One thing that makes the election outcome extremely pivotal is that US voters are more divided than ever on key topics ranging from immigration, tax policies, foreign policy, and in general societal values. The geopolitical stakes for the US and its allies and rivals are particularly high as Harris and Trump have very different convictions and attitudes.
What does history tell us about how equities respond to the US election result?
In How US elections have shaped market performance in modern history we took a look at market performance in US equities over the previous 13 elections since 1972. What we find is that there is no significant difference in compounded returns in election years compared to non-election years. Given the efficiency of financial markets that is also what you would expect. What we did find was there is a weak claim to be made that a strong equity market going into the election favours the party controlling the White House. One should of course be careful reading too much into these statistics as the number of observations is small. Another finding was that the one-year return in S&P 500 post-election is generally much higher for the Democratic Party, but again there was some great timing and luck in these results as the Democratic Party won the election prior to the three rebound years of 1976, 1996, and 2020.The role of polls and prediction markets
Election polls have always played an important role in shaping expectations for election outcomes. But polls badly missed the realities on the ground in key parts of the US like the Midwest states that went for Trump, which gave him the White House in 2016. This came just months after the polls also failed to predict the Brexit vote. Since 2016 polls have carried less weight, but they are still important to track as indications of momentum and who is leading in the polls. Using the 538 website model tracking several election polls, Harris has a seemingly comfortable 3.6%-point lead over Trump as of 29 August and thus with little more than two months to the election. Much can happen by the time Americans go to the election ballot box. That 538 website, owned by ABC News, offers a nice collection of polling and other information and graphics on the US election.Another method for gauging who is likely to win the election is in “real-money” prediction markets. The two most famous prediction markets are PredictIt and Polymarket. On those markets, users place bets with real money on specific event outcomes, including the US 2024 election. As of 30 August, it is interesting to observe the difference in those two prediction markets. PredictIt has a 6%-point lead to Harris while Polymarket has a 1%-point lead to Trump and over $750 million on the line.
The potential outcomes and their implications
With the polls and betting markets at odds, it’s safe to say the election outcome is highly uncertain. And if the uncertainty persists up to Election Day, the reaction function will inevitably prove quite large. Below we have a look at the most likely election outcomes and what their implications are. The highest probability scenarios if the overall popular vote is relatively close or very slightly leaning Democratic is for either a Trump clean sweep or a Harris-gridlock scenario, because the Senate election map looks very difficult for the Democrats this year. Read more here on the very odd US Presidential election process and on the 2024 Congressional elections.1) A Trump clean sweep’s impact on the financial markets
Outcome: Trump wins the presidential election and the Republican Party controls both houses of the US Congress.Probability: 45% as long as Trump is polling within a few points of Harris.
Policy impact: Trump’s three main policy objectives are:
1) Immigration and border security
2) Trade and economic policy
3) Foreign policy
On the immigration issue, he has even promised mass deportations of undocumented immigrants. On trade and economic policy issues, he has demanded significantly higher tariff on imports, targeting especially China, and more tax cuts. The economic backdrop, with much higher starting points for the fiscal deficit and total US debt, makes tax cuts far more difficult than the ones he brought in 2017. On the foreign policy issue, Trump’s “America First” approach could lead to increased friction with China and less support for Ukraine, which could cause great geopolitical uncertainty in Europe.
Economic impact: if carried out, these policies could cause labour shortages during a period of increased demand for blue collar workers as the US is experiencing a renaissance in manufacturing. Labour shortages would likely lead to more inflation through higher wages. Higher tariffs would lead to higher inflation as well and disrupt global supply chains with the semiconductor industry being the most at risk. Lower taxes would be great for businesses and potentially growth. Trump’s foreign policy could lead to unpredictable outcomes in relation if US and Chinese lurch into a trade war, especially with Taiwan in the mix, as it is the dominant producer of high-end semiconductor chips. For Europe, the status and US commitment to NATO and the war in Ukraine are critical.
Market impact: Higher tariffs on imports and lower taxes would in theory be good for US small caps and generally for companies with most of their revenue coming from the US economy. The geopolitical uncertainty stemming from Trump’s foreign policy might be positive for gold and gold miners. European defence companies should see a boost from a Trump clean sweep because Europe would be forced to accelerate spending plans on its own defence industry should the US lower its commitment in Ukraine and continue to erode trust in the strength of NATO. Banks could also see a boost from tax policies and Trump’s general desire to deregulate.
2) A Harris gridlock’s impact on the financial markets
Outcome: Harris wins the presidential election, but control of US Congress is split.Probability: 45% as long as Harris has a slight lead in the polls (Electoral College system favours Trump slightly, meaning he can lose popular vote but win presidency like in 2016).
Policy impact: This outcome leads most likely to a policy stalemate as a split Congress, given the partisan environment, would lead to a Republican-controlled Senate blocking almost every new initiative from Harris and the Democrats. It would mean that Harris’ policy objectives of healthcare reform and tax increases will not pass. It could also jeopardize extending current stimulus bills enacted during the Trump and Biden administrations, which raises the risk of a recession in 2025. A split Congress scenario would also mean status quo on China, maintaining the current tariffs. On an issue like Ukraine it would be difficult for the US to maintain or increase its engagement without the Democrats giving in to some of the Republican policy objectives.
Economic impact: This scenario is potentially the worst scenario for growth as the US economy is currently operating at roughly a 7% fiscal deficit and a split Congress would constrain any ability to maintain or increase the level of spending. A negative fiscal impulse would slow down the economy in 2025 and beyond, but a Fed cutting cycle would offset some of the pain. A split Congress scenario is likely the best scenario in terms of getting inflation back down towards the target of 2%.
Market impact: The immediate reaction might actually be positive as the market will be relieved that inflationary populist policies cannot be implemented as under either sweep scenario. However, the potential impact on the economy from a negative fiscal impulse in 2025 and beyond might have investors rethinking their economic outlook and rotating portfolios into more defensive sectors in preparation for a recession.
3) A Harris clean sweep’s impact on the financial markets
Outcome: Harris wins the presidential election, and the Democratic Party controls both houses of the US Congress
Probability: 10% unless Harris is pulling ahead strongly in the polls by Election Day.
Policy impact: Harris’ three main policy objectives are:
1) Healthcare access and affordability
2) Economic growth and housing
3) Climate change and clean energy
On the healthcare issue, the policy would cap insulin copay and limit costs for out-of-pocket drug costs on top of expanding the Affordable Care Act. On the economic growth and housing policy objectives, a Harris sweep would lead to tax incentives for home builders and assistance for first-time home buyers while increasing taxes for corporations and high-income earners. She has even discussed a tax on unrealized capital gains for the super-wealthy. On the climate change issue, this scenario would likely lead to significant investments in clean energy and electrification. While Harris has not talked much about foreign policy a Harris clean sweep would likely lead to continued support for Ukraine’s war effort.
Economic impact: Many of Harris’ policies could lead to more inflation. The interference with pricing, for example from her intent to address “price gouging” by supermarkets, is one example. But broadly speaking, more spending and more economic incentives creates an inflationary dynamic as consumption increases. Pharmaceutical companies could be the big losers in this scenario as Harris would push for increased regulation of drug prices. The fiscal deficit would likely increase leading to higher growth in the short-term, also inflationary. Higher tax rates on corporations would lower corporate earnings short-term. Incentives for home builders could kickstart job creation in the homebuilding industry and increase household formation which in turn stimulates growth on related spending. More investments in clean energy comes with potentially higher electricity prices and more outrages in the US electricity grid.
Market impact: The obvious market impact is a rally in clean energy stocks from a Harris sweep as a lot of legislation in favour of clean energy can be expected. The focus on housing could lead to a positive impact for homebuilders and industrials focused on infrastructure. Semiconductors should also react more positively to a Harris sweep as it limits the impact from higher tariffs. Harris, although tough on China, would likely lead to a positive reaction in emerging markets because of less likelihood of steep tariffs and European equities could also see a repricing higher in a Harris sweep scenario.
While the US election is an important event this year and could shape the economy and geopolitics in the years to come it is important to take a long-term view. Most investors should maintain a long-term strategy in their portfolio and avoid excessive stock-picking in their approach, keeping discretionary allocations balanced against diverse exposure to the markets. For some investors with specific positions that dominate their portfolios, the election outcome might be a reason to make adjustments. For example, for investors with high weightings to renewable energy stocks a Trump clean sweep scenario could mean an unattractive environment for these stocks over the next four years. Another example is an investor with heavy exposure to growth and tech stocks where the outlook could be difficult in a scenario of Harris winning but with a gridlocked US Congress.
Related Articles
US Election
US Election
Latest Market Insights
Quarterly Outlook 2024 Q3
Sandcastle economics
-
Bonds: What to do until inflation stabilises
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain inflation and evolving monetary policies.
-
Equities: Are we blowing bubbles again
Explore key trends and opportunities in European equities and electrification theme as market dynamics echo 2021's rally.
-
FX: Risk-on currencies to surge against havens
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperform in Q3 2024.
-
Commodities: Energy and grains in focus as metals pause
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities in Q3 2024.
Disclaimer