November 5, 2024
What will be the consequences for stock markets?
Despite the global interest in such elections, the long-term impact on US financial markets is generally minimal, with broader economic fundamentals playing a more important role over time. Factors such as economic growth, inflation and interest rates determine market trends more consistently than the ruling party or the president’s policies.
Historical perspective and market preference
Here we consider the notion that markets prefer a Republican or Democratic administration. Historically, both parties have performed well under different presidencies, which does not suggest a clear partisan advantage for stock markets. While election periods are often synonymous with short-term volatility, financial markets tend to benefit from a balanced power dynamic, such as a divided government, that prevents radical legislative changes and promotes stability. For example, a Democratic president with a Republican-controlled Congress is seen as a favourable configuration for markets because of its control over unilateral policy changes.
Political implications of the 2024 candidates
While the traditional economic policies of Democrats and Republicans differ, with Democrats often favouring corporate tax increases and Republicans favouring tax cuts, these differences may not have a profound effect on the markets. Unexpected events or external factors often overshadow these political preferences. In the current race, Harris and Trump are prioritising different campaign themes beyond economics, with social and cultural issues likely to influence voters more than detailed economic plans.
Trump is focusing on increasing customs tariffs and potentially reducing international commitments, which could affect trade relations and budget spending. Its previous tariffs on China have had mixed results, raising domestic costs and hurting specific sectors, such as agriculture. However, Trump’s base remains supportive of his protectionist approach. Harris’ economic agenda, by contrast, should align more closely with traditional Democratic positions, with a focus on wealth redistribution and regulatory scrutiny, even if the impact on markets is likely to be limited.
Sectoral impacts and investment outlook
The analysis highlights some sectors that could react differently depending on the outcome of the election. A Trump administration could prioritise deregulation, particularly in the banking and fossil fuel sectors. However, this approach does not guarantee success for these industries, evidence being that regulatory setbacks contributed to problems such as the bankruptcy of some regional banks in 2023. Moreover, a Harris presidency could promote clean energy and increased scrutiny of large companies, particularly in the pharmaceutical and technology sectors. In theory, this could benefit bonds and stabilise European markets, although Chinese companies are likely to face continued pressure from either administration.
Geopolitical considerations and budgetary concerns
It is also important to mention the US budget deficit, noting that both parties have limited room for manoeuvre to address it through conventional means, such as tax increases or drastic spending cuts. Trump’s proposals to cut international military spending and use tariffs to boost revenue are seen as potential ways to cope with budget constraints, even if the results are uncertain. His approach to conflicts, such as those in Ukraine and Taiwan, could alter U.S. commitments abroad, with the aim of cutting spending while maintaining a strong domestic position. Harris’ approach would likely maintain support for allied nations, but within a framework of more conservative spending.
Social and cultural dynamics of the election
The candidates’ positions on social issues should play a key role in voter participation, especially in the states where elections are held. Harris’ positions on progressive social policies could alienate moderate voters in the central and rural areas of the United States, creating difficulties in states with diverse political tendencies. Trump, meanwhile, capitalises on the perception that American cultural norms are under threat, attracting voters who feel marginalised by changing social values.
Conclusion and market expectations
Ultimately, whoever wins the election, any immediate market reaction is likely to be short-lived. Investors should recalibrate themselves based on underlying economic indicators such as corporate earnings, inflation expectations and demographic changes, rather than solely on political changes. The most disruptive scenario would be a contested or uncertain election, which could lead to prolonged market volatility and political tensions.
Written by Stefan Duchateau, fund manager PTAM Global Allocation