Investing and the US election

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

One of the biggest events of the year for voters and investors, the US presidential election, is less than a month away. The two contenders are neck and neck in the polls. A few thousand votes in just a handful of states could decide the leader of the world’s largest economy. 

Difficult to gauge 

Despite all the press coverage of the twists-and-turns in the race to the White House, there are simply too many variables to reliably predict what might influence US policy and decision-making in coming months.

The new leader’s ability to govern and implement their platform will likely be shaped by the US Congress. If power is split between the Republicans and Democrats in the House of Representatives and the Senate, then passing legislation could be a struggle.  

In addition, what is said on the campaign trail doesn’t necessarily become policy. So, while Donald Trump might have considered repealing Obamacare¹, it was never repealed. Meanwhile, Joe Biden suggested in 2020 that the federal tax rate on corporations would be increased from 21% to 28%² if he became president. Again, it didn’t become law.

One reason why it is so difficult to gauge the impact of potential election promises on the real world is that such analyses are performed on the basis that everything else remained static. But this is never the case. For instance, imposing trade tariffs might see currencies move, countries retaliate, and companies and consumers alter their behaviour. 

Reading between the lines

Looking at the US election race, and based on the candidates’ current narrative, two main macroeconomic themes spring to mind. 

Additional tariffs could inflame inflation, especially if implemented widely. Their magnitude would much depend on how much companies absorb some of the higher costs through margin compression, and consumers’ ability to stomach higher prices. By contrast, and at the extreme end of the scale, more tariffs might cause prices to fall, or deflation, if they caused a recession.

Immigration is another ‘hot’ topic for many voters in this election. Both candidates seem to want more controlled immigration. Intuitively, less immigration could tighten the US job market and so see higher wages, and possibly inflation. However, the ultimate impact could be vastly different, depending on which types of workers are kept out of the country. 

Addressing some taxing issues

In any analysis of potential government regulation, two areas are vital: the fiscal and monetary policies that would accompany any reforms. Indeed, the ballooning US deficit has received little, if any, attention from both candidates. In addition, neither of them seems to have a clear plan to address the issue markedly.  

Markets can often act as a brake on policy direction. For instance, investors might stop the next leader of the US from implementing any plan that would lift the deficit as a consequence. Similarly, a significant shift in inflation could cause the US central bank to act, possibly superseding the impact of any political decision.

As such, trying to calculate the effect of more tariffs or fewer immigrants is arguably pointless. More than that, what really matters for investors is how markets respond. However, here again, it’s difficult to build any conviction.  

Market reaction to a president may seem almost perverse in hindsight. For instance, Trump was expected to be positive for US oil companies, with his aim of positioning the country to achieve energy independence³. In fact, energy was the worst performing S&P 500 sector under his presidency. Ironically, it was the best performing one under the much “greener” President Biden.

What next? 

Much noise has been made of the potential impact that the next president could have on the economy. While the election is a major catalyst that will move markets to some extent in the short term, it will matter little in the long term. 

Instead of being too concerned about the immediate impact of the election, investors should remain focused on their long-term goals and stay well diversified, while remaining nimble. Looking at the potential ramifications and scenarios around the event is not about waiting for perfect visibility, just an improvement in the range of possibilities. 

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