Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
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.
2) A Harris gridlock’s impact on the financial markets
Outcome: Harris wins the presidential election, but control of US Congress is split.
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.