At least for now, the markets are still mostly affected by economic news – inflation, the situation in the labor market and base interest rates. The election is too close for investors to confidently weight their investments based on the expectations of the election winner. Historically, there have been large swings during election periods, but they have usually been relatively short-lived.
Often the differences between the candidates seem obvious at first glance, but in practice they are not very different. During the previous term, both D. Trump and the current US President Joe Biden pursued a protectionist policy towards China and abundantly stimulated the country’s economy with fiscal measures. These aspects of economic policy will not change no matter who wins the election in November. During both terms, conditions were favorable for US business, and the S&P 500 index rose by 60-70% during both terms.
Although elections usually do not have a long-term impact on the results of US stock markets, this time there are fears that Trump’s second term will be more radical and could mean a break in US economic policy that would have long-term consequences.
D.Trump’s protectionist agenda
D. Trump is usually seen as a more pro-business candidate. What his agenda would look like if he wins is not entirely clear. However, lower taxes are expected for higher earners, from 21 percent. up to 15 percent reduced corporate tax, loosened environmental requirements. All of these factors are favorable for stock prices, at least in the short term.
In addition, it is expected that D.Trump’s protectionist policy will be broader – not only high tariffs for China will remain, but also 10-20 percent. seeking tariffs for all trading partners. On the one hand, such primitive protectionism would increase the competitiveness of local industry, but it would cause an additional inflationary shock, weakening the purchasing power of US consumers, which is one of the main sources of US growth.
It is believed that Trump’s economic reforms could increase the government’s financial deficit to 8-9 percent, and such an injection of money would significantly stimulate the economy while increasing the risk of a new price shock. The Federal Reserve Bank (FED) would likely have to keep interest rates higher and bond yields would rise.
Both candidates intend to boost the US economy, albeit in different ways.
Looking at individual sectors, analysts estimate that such a package of measures would favor smaller industrial companies, which would become more competitive due to trade restrictions. Fossil fuel companies would benefit from looser environmental standards. Historically, the Trump administration has also been favorable to the financial and defense sectors.
Harris promises evolution, not revolution
The economy is often seen as Harris’ weak point and her campaign has been less vocal about economic reforms. Her economic plan largely promises to continue the policies of her predecessor, with some increases in tax progressivity and social security funding.
During his tenure, D.Trump temporarily reduced income taxes, K.Harris promises to extend this decision only to low- and middle-income families, which means that taxes would increase for those who earn more. K. Harris also intends to expand social assistance for families with children, usually Democrats pay more attention to health care.
During the presidency of K. Harris, J. Biden’s industrial policy would likely continue, the Democratic administration would invest a lot in renewable energy and infrastructure. The housing affordability crisis is a significant theme in her campaign. The US presidential candidate intends to provide more support to families purchasing their first home and to carry out regional planning reform by providing more plots of land for the construction of residential houses.
Harris’ economic plan will also be expensive and keep the deficit very high, but likely lower than Trump’s proposals. Economists estimate that K.Harris’s plan will put less pressure on prices, so the Fed could apply lower base interest rates, which would lead to lower bond yields.
It is believed that the Democrats’ plan would favor companies in the health sector, construction, renewable energy and technology. The plans of candidates from both parties provide a significant boost to the economy, which will favor the US stock market, but the sectors “winners” are likely to differ depending on the outcome of the election.
Market reactions outside the US
Both candidates intend to boost the US economy, albeit in different ways. The U.S. stock market would likely do well under both candidates, but the same cannot be said for the rest of the world.
The European stock market is often sensitive to US political events. For example, after it became clear that Mr. Biden won the election, the Stoxx 600 European stock index rose by as much as 9 percent during the week. Trump’s victory is a risk for the European stock market, as it is Europe that would be the biggest loser of more intense trade wars. European exporting companies are heavily dependent on the US market, so higher tariffs would have a significant impact on their financial performance.
In the case of China, there is a little less uncertainty, but there is little good news. Both parties maintain tough trade policies with China and seek to build supply chains that are independent of China. Therefore, the election result will not fundamentally change the situation in China.
The impact of politics on the markets is difficult to predict
Historical research shows that elections have no clear long-term impact on investment returns. On the other hand, if the candidates’ reforms, such as turning away from free trade, fundamentally change the structure of the US economy, this could have long-term consequences for financial markets. The promises of the candidates are favorable to different sectors of the economy, but this does not always translate into good results in the stock market. For example, even though Mr. Biden was against oil companies, during his presidency the share price of oil and gas companies tripled.
Candidates’ election promises do not always turn into decisions, so it is not easy to say in advance which candidate will be more favorable to investors. In addition, it should be remembered that the elections to the House of Representatives will be held together with the presidential elections. It is possible that the winners in this election will not be the same. If that were to happen, the president-elect would be limited in his ability to implement controversial reforms and would have to find compromises between the positions of Democrats and Republicans. Markets would probably welcome such a scenario, as it would mean relative stability in the situation.
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Interview with Dr. Emily Carter, Economist and Market Analyst
Interviewer: Thank you for joining us, Dr. Carter. With the upcoming election looming, how do you see the current economic landscape influencing market behavior?
Dr. Carter: Thank you for having me. It’s a pivotal time for the markets, and they are largely still responding to economic conditions like inflation, labor market dynamics, and interest rates rather than directly to the political climate. Investors seem hesitant to make major moves based solely on electoral forecasts, given the historical volatility that often accompanies election periods.
Interviewer: You mentioned historical patterns. Despite short-term swings during election times, what does your research suggest about the long-term impact of these elections on the stock market?
Dr. Carter: Historically, the long-term effects tend to be minimal. Both candidates, Trump and Biden, have pursued similar economic policies during their respective terms, such as protectionist strategies towards China and substantial fiscal stimulus. Even with the potential for a more radical shift under Trump if he regains office, many economic fundamentals could remain unchanged.
Interviewer: Trump’s potential return presents a different economic strategy, particularly regarding corporate taxes and tariffs. How could that impact U.S. businesses and, by extension, the stock market?
Dr. Carter: Trump’s proposed policies could indeed favor certain sectors, such as industrials and fossil fuels, through lower corporate taxes and relaxed environmental regulations. However, while that may give short-term boosts to stock prices, a broader protectionist agenda could also lead to inflationary pressures that might ultimately undercut consumer purchasing power, which is a key driver of economic growth.
Interviewer: On the other hand, we have Kamala Harris, who seems to advocate for a more measured approach. What differences do you foresee in market reactions under her potential presidency?
Dr. Carter: Harris’s plan appears more progressive, aimed at increasing support for low- and middle-income families while maintaining some social safety net expansions. While her administration’s policies may incur high deficits, they could also exert less upward pressure on prices, potentially allowing the Federal Reserve to keep interest rates lower. This might favor sectors like healthcare, renewable energy, and technology.
Interviewer: How might these candidate-specific policies ripple out beyond the U.S. markets, particularly in Europe and China?
Dr. Carter: European markets are exceptionally sensitive to U.S. political outcomes. For instance, we saw significant gains following Biden’s victory, while Trump’s aggressive trade policies could pose a greater risk to European exporters. With China, both candidates maintain tough stances, so while there may be some policy continuity, the fundamental concerns of trade and supply chain independence will remain.
Interviewer: Given this uncertainty, how should investors navigate the upcoming election while balancing risks and potential rewards?
Dr. Carter: Investors should remain vigilant but not overly reactive. It’s crucial to focus on underlying economic conditions rather than election outcomes alone. Diversifying portfolios across sectors that might benefit from either candidate’s policies can provide a solid buffer against volatility. Ultimately, understanding how proposed reforms might impact various markets and industries is key to making informed decisions.
Interviewer: Thank you for your insights, Dr. Carter. It’s clear that while the election will indeed have an impact on the markets, economic fundamentals will continue to play a crucial role.
Dr. Carter: Absolutely, and thank you for having me. It’s an exciting yet complex time for investors, and preparing strategically is more important than ever.
Tics, often reacting strongly to major electoral outcomes. For example, Biden’s victory last time significantly boosted the European stock index. Conversely, if Trump were to win and escalate trade tensions, particularly with higher tariffs, Europe could face substantial repercussions, given its dependence on trade with the U.S. As for China, both candidates are likely to maintain tough stances, which would mean continued uncertainty for investors regarding that market regardless of who wins.
Interviewer: With all of this in mind, how should investors approach their strategies ahead of the election?
Dr. Carter: Caution seems prudent. While there are likely to be short-term movements tied to electoral outcomes, it is essential for investors to maintain a long-term perspective and focus on fundamentals. Diversifying portfolios and staying attuned to economic indicators—such as inflation rates and labor market trends—will be vital. Moreover, monitoring the outcomes not just of the presidential race but the House of Representatives elections will also provide insights into the likely stability of any upcoming administration.
Interviewer: Thank you, Dr. Carter. Your insights will certainly help our viewers navigate these uncertain times as we approach the elections.
Dr. Carter: Thank you for having me. It’s important to stay informed and adaptable in this ever-changing economic landscape.
