Anticipating the US presidential election

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below.

All data referenced in this article are sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

Key points

• Much noise is being made over the outcome of November’s US presidential election. Just how easy is it to predict its ramifications on the US economy and markets? 
• The answer is less than many would suspect. Whoever wins the election will have their ability to govern much dictated by the shape of the US Congress.
• Both candidates relative silence over the ballooning US deficit and a strategy with which to address it is illuminating. Markets may ultimately force the winner to act. 
• The poor performance of energy stocks under a pro-oil President Trump and their subsequent outperformance during the current, pro-green, president highlights the difficulties of forecasting what the result of the election might mean. As such, the result of the election in itself is no reason to change your long-term investment strategy.

One of the most significant ‘known unknowns’ of 2024 is less than one month away. Indeed, the 47th president of the United States will be – or at least should be – elected on 5 November. Kamala Harris and Donald Trump are neck and neck in the polls. A few thousand votes in a handful of swing states are likely to decide the leader of the world’s largest economy over the next four years. 

The illusion of predictions

Over the past few months, many pundits have embarked on an elusive — and largely irrelevant — attempt to quantify the impact that each presidential candidate would have on domestic growth, inflation, interest rates and financial markets. The reality is that there are too many variables and unknowns to reliably predict what could happen over the next few months.

First, the next president’s ability to govern and implement their platform will depend heavily on the shape of the US Congress. A clean sweep would grant them ‘full power’. However, if this power is split between Republicans and Democrats in the House of Representatives and the Senate, then passing (almost) any new law may be a challenge. The latter is what markets appear to be discounting, for now.

Second, it’s important to differentiate between what’s being said on the campaign trail and what’s likely to be implemented. For example, during his first presidential campaign, Donald Trump touted the idea of repealing Obamacare¹. Although few changes were introduced to the Affordable Care Act, it was never repealed. Similarly, candidate Joe Biden suggested in 2020 that when president he would increase the federal tax rate on corporations from 21% to 28%². Again, this hasn’t happened.

Finally, most of these analyses are performed ceteris paribus. In other words, when looking at the possible impact of import tariffs for example, economists tend to assume that apart from the levies themselves, nothing else will happen. This is never the case. In this instance, currencies will move, the countries impacted may retaliate, and companies and consumers will change behaviour and adapt. These second and third derivatives can’t be modelled with any degree of certainty.

The big picture

All we can do then is to share some high-level thoughts on the issues at stake. Based on the current narrative from candidates, we see two main macroeconomic themes.

Additional tariffs, especially if implemented across the board, could promote an inflationary impulse. Its magnitude will be heavily dependent on i) companies’ willingness to absorb some of these higher costs through margins compression, and ii) consumers’ ability to tolerate higher prices. At the extreme, increased tariffs could be deflationary if they lead to a severe economic contraction.

Immigration is another key topic in this election. Overall, both candidates advocate more controlled immigration, with Donald Trump’s proposals being more ‘extreme’, given that the former president could decide to deport “millions” of undocumented immigrants, according to some press reports³. 

Intuitively, lower immigration could tighten the US job market, leading to higher wages and possibly inflation. The reality is, once again, more complex and the ultimate impact would vary significantly depending on which type of workforce is prevented from entering the US.

Fiscal versus monetary

Most importantly, these analyses make assumptions about the fiscal and monetary policies that will accompany any measures related to tariffs or immigration. Indeed, both candidates have been relatively quiet about the ballooning US deficit, and none seems to have a clear plan to drastically reduce government debt levels. 

Markets may push yields higher and prevent the next president from implementing any policy that would result in a larger deficit. Similarly, should inflation rise (or maybe collapse), one should expect the US Federal Reserve to act. A change in monetary policy could easily supersede the impact of any political decision.

Without knowing how these two critical variables would react, estimating the impact of higher tariffs or lower immigration appears futile. Not only that, but for investors what really matters is how markets would react. Here again, it’s nearly impossible to build any conviction. The chart below should serve as a strong reminder that a simple narrative is often a bad investment counsellor.

Indeed, in 2016, the story went that President Donald Trump would be a boon for the US oil industry as he wanted the country to achieve energy independance⁴. Energy was the worst performing S&P 500 sector under his presidency (see chart). Ironically, it was the best performing one under President Biden, who was seen as running a much “greener” agenda.

S&P 500 sectoral performance through Trump’s and Biden’s tenures

The performance of the S&P 500 from the date the president was elected until the end of July in their fourth year in power 

The bottom line

Investors should be sceptical when experts claim to be able to forecast what the upcoming US presidential election means for the economy and, more importantly, for investors. Of course, this is a major catalyst that will undoubtedly move markets in the short term. However, options pricing suggests that volatility is already expected.

In addition, trying to anticipate what these moves could be is a losing proposition, in our view. Instead, we believe that investors should remain focused on their long-term goals and stay well diversified, while remaining nimble. It’s not about waiting for perfect visibility, just an improvement in the range of possibles.

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