Elections and markets: Part II

What are we betting on?

Dear friends,

This is our second post in a series of articles we’re writing to share our ideas and convictions about markets and personal finance.

In the 1992 campaign, Bill Clinton was facing then-President George H.W. Bush (Bush Sr.), who was coming off a streak of extremely high popularity, close to 90%, after the success of the Gulf War. He seemed unbeatable, but there was one problem voters couldn’t stop feeling: the economy. At that time, the United States was going through a recession, with high unemployment rates and economic growth that was barely moving forward.

James Carville, Clinton’s strategist, decided the campaign needed to focus on what really mattered to voters. It was at that moment that he coined the famous phrase on a sign for members of his campaign: “It’s the economy, stupid.” The message was clear: to remind everyone that the economy was the crucial point that would tip the balance.

Following Clinton’s victory, the saying has become a kind of golden rule in political campaigns, reminding us that, when it comes to elections, nothing matters as much as the money in voters’ pockets.

In our latest post, “Elections and Markets: Election Years in the U.S..”, we explored how electoral cycles have historically affected markets. We talked about patterns and trends that help us understand how the market reacts to electoral uncertainty. Now, with Trump and Harris offering different promises, it’s important to understand which paths they want to take: we’re not only seeing the typical fluctuations of election years, but each proposal has the potential to cause specific and lasting impacts.

• International Trade: Trump maintains his “America First” focus, proposing a 60% tariff increase on China and 20% on the rest of the world. This sounds like a recipe for a trade war 2.0, which could be bad news for sectors like Basic Materials and Technology, which depend on global trade. Harris, meanwhile, sticks to the status quo, keeping Biden’s policies toward China (which actually originally come from Trump) but without proposing more tariffs. At the end of the day, Trump seems willing to enter into a trade conflict, while Harris is betting on not stirring the waters further, but she also isn’t proposing to roll back these policies originally implemented by Trump.

• Taxes: Trump proposes a drastic cut in corporate taxes to 15%, which would largely benefit banks and Industrial companies, but it’s an ambitious promise with an impact on the size of the national debt. Harris, by contrast, plans to raise corporate taxes to 28%, which, according to the Tax Foundation, could cost the economy 800,000 jobs and slow GDP. In short, Trump is betting on business-led growth, while Harris focuses on public spending.

• Inflation: Trump’s tariff policy could fuel inflation. Goldman Sachs estimates that for every 1% increase in tariffs, inflation would rise by 0.1 basis points. Harris, without a tariff agenda, offers a path of lower volatility on this front.

• Regulation: Trump promises massive deregulation, especially in Energy and Finance. This could be a bonanza for big oil companies and banks. Harris, however, aligns more with Biden’s regulatory approach, which implies a firmer hand over Technology and Financial Services. Harris also proposes greater protection of consumer rights.

• Energy and Climate Change: Trump plans to double fossil energy production with the goal of cutting energy prices in half. In our view, this is hardly achievable. Harris, on the other hand, seeks to advance emissions reductions and maintain more regulation over oil companies. Traditional energy stocks could perform well under Trump.

Although their visions differ, both candidates agree on a tough policy toward China and a focus on strengthening domestic manufacturing. This common ground reflects a reality shared by both parties: the need to preserve the United States’ economic leadership in an increasingly competitive global environment.

However, the main risks of this election lie in the polarization of their proposals. On the one hand, Trump’s approach could lead to inflation volatility and a growing national debt. On the other hand, Harris’s plan could mean a greater tax burden for key companies and a slowdown in GDP growth.

As for the odds of victory, the betting market seems to strongly favor Trump. Meanwhile, polls indicate a much tighter race (see charts below). However, this seems to change constantly. Let’s remember that the U.S. electoral system is based on the Electoral College and not the popular vote, and the election will be decided in a few key states.

Real Clear Politics as of 10/23/2024

Source: 270towin

In these uncertain times, it’s crucial for investors to assess their portfolios and consider diversification strategies that can withstand the volatility of the electoral cycle. Our view is that, even if there are some adjustments, it’s essential not to fall into hasty decisions. The key is to remember that markets, while sensitive, are also resilient over the long term regardless of which political party is in power.

Source: Morningstar, Blackrock

Once the elections are over (and, hopefully, we can change the subject), and as we get closer to the end of 2024, it will be a good time to plan tax strategies for 2025. We’ll talk about this in our next issue.

Article written by Michael Marciano. Edited by Roberto Vainrub. Contributions by Hector Crocker

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