How Will the US Election Impact the Market?
The outcome of the US election has historically had significant effects on global financial markets, shaping investor sentiment, policies, and economic outlooks. With the next US election approaching, market participants are paying close attention to how potential shifts in political power might impact various industries and asset classes.
Policy Uncertainty:
However, when Harris delivered a lackluster performance in a CNN interview, her campaign faced its first major setback, providing the Trump team with a much-needed boost. More importantly, as initial enthusiasm for Harris wanes, the focus has shifted back to policy details—or the lack thereof. On hot-button issues like immigration, tariffs, foreign policy, and climate change, the two candidates have clear differences. Yet, in terms of economic policy, at least from a market perspective, the pros and cons are not as evident.
Tax Cuts and Spending:
Traditionally, the Republican Party supports tax cuts, while the Democratic Party leans towards increased spending. Neither candidate has deviated from these norms. Trump aims to extend the 2017 Tax Cuts and Jobs Act from his first term, which is set to expire in 2025, and promises further reductions in corporate tax rates. Additionally, other tax cuts are in the pipeline. Therefore, it’s not surprising that most investors favor a Trump victory in the election on November 5th. However, from the voters’ perspective, these advantages are less apparent. Since the 2008 financial crisis, the US has been running excessive budget deficits, with government debt tripling during this period to nearly $35 trillion.
America’s Growing Debt Mountain:
Research from the University of Pennsylvania's Wharton School Budget Model indicates that if Trump wins, US debt could increase by $5.8 trillion over the next decade, whereas Harris’s policies would add only $1.2 trillion. If the growing deficit issue is not addressed, a debt event similar to the UK's small budget crisis could occur, as it is doubtful whether markets can ignore this issue indefinitely.
US-China Trade War 2.0:
Another concern is that Trump's sole new revenue source is higher tariffs on all imports (10%), with tariffs on Chinese goods reaching as high as 60%. Regardless of whether this policy succeeds in bringing manufacturing back to the US, the costs for domestic producers and retailers will immediately rise, thereby increasing prices for a range of goods for American consumers. This could undermine the Federal Reserve's efforts to combat inflation, leaving policymakers with less room to cut interest rates. Therefore, Trump's tax cuts and tariff policies come with significant uncertainty, which is why some businesses may prefer the policy continuity promised by a Harris administration. Harris’s proposals primarily focus on helping families cope with the cost-of-living crisis.
Biden’s Mixed Economic Track Record:
High inflation has been the biggest weakness of the Biden administration, overshadowing what should have been commendable economic achievements. However, Harris faces the challenge of not being able to entirely distance herself from Biden’s legacy as his Vice President.
For the Democratic Party, a more concerning issue than a lack of compelling policies might be the risk of a deteriorating labor market before election day. The Federal Reserve seems poised to begin rate cuts at its September meeting, but this may be too little, too late for voters. Worse still, if the worsening job situation is not accompanied by an unexpected drop in inflation, the likelihood of significant rate cuts diminishes, making a substantial rebound on Wall Street hard to achieve.
In summary, the upcoming US election will bring new dynamics to the market, with tax, government spending, and regulatory policies playing a key role. Investors should be prepared for potential volatility and stay informed as the political landscape changes. While short-term market reactions may be driven by the election results, the long-term impact will depend on how new policies are implemented and their effects on economic growth.
