What are the main risks and possible consequences for the markets in case the Democrats and Kamala Harris win the US elections? And what if the Republicans and Donald Trump win? Which asset classes could benefit? And what are the consequences for asset allocation in general? Bruno Lamoral, Portfolio Manager at DPAM shares his vision in this contribution to our site.
What if Harris wins?
At the moment, the polls for the American elections do not yet show a clear winner. Kamala Harris is above Donald Trump in the national polls, but in the betting markets we see the opposite picture. To this day, it remains difficult to estimate who will win the elections. Polls don’t say everything either. In 2016 and 2020, Trump did not do well in the polls, but he still managed to surprise. However, there is a good chance that if Harris wins, she will face a divided parliament. This scenario also seems to be favored by the markets, as it would lead to only marginal, impartial changes to existing economic policies.
But what if Kamala Harris wins the presidency and Democrats also gain control of both the Senate and the House of Representatives? One of the market’s biggest concerns is the planned changes in tax rates. Kamala Harris is aiming for a sweeping tax reform, ranging from the introduction of a minimum tax rate and an increase in long-term capital gains taxes for the very rich, to a quadrupling of the tax on stock buybacks. But the proposal to increase the corporate tax rate from 21 to 28 percent would have the biggest impact on the financial markets. It is estimated that this would reduce the profits of S&P500 companies by 6 percent, which would represent a significant headwind to overall market performance. This is in stark contrast to Trump’s proposal for a 15 percent corporate tax rate, which would have the opposite effect.
Another focus of Harris’ campaign is combating inflation, an issue on which Biden has often been criticized. Her proposal to federally ban the raising of supermarket prices is meeting resistance. Economists say that price controls often do not produce the desired results and question the need for such measures, especially now that inflation is already falling. Those government actions, including its plans for the rental market, have reduced its appeal to Wall Street. In response, Harris is trying to improve her pro-business image by saying she supports free and fair markets. But her shifting rhetoric, along with her unclear positioning on issues like trade policy and geopolitics, is adding to the uncertainty.
Therefore, an outright Democratic election victory will likely lead to a negative market reaction for stocks. However, we think such a victory is less likely. Most of her proposed measures require legislative changes, so with a divided parliament there would be little change across asset classes. And the market would respond more positively to that.
What if Trump wins?
A Republican victory, especially with Donald Trump as president, could have a significant impact on the economy and asset markets. While the proposed corporate tax cut from 21 to 15 percent would be welcomed by the stock markets, other government plans, including high rates and a tough stance on immigration, would likely lead to higher inflation and slower economic growth. For example, a 60 percent tariff on Chinese goods and 10 percent on other global imports would raise overall tariffs to the highest level since 1930. Chinese and European markets are likely to be hit the hardest as they are the two major trading partners running bilateral goods surpluses of more than $200 billion with the US. But the U.S. market itself could also be negatively affected if residents experience increased inflation due to a combination of higher import prices and more expensive domestic production. In addition, strict immigration policies may exacerbate labor shortages, raising labor costs and further driving up inflation.
But what are the consequences of a Republican election victory for the different asset classes? Renewables have already been devalued as Trump is expected to withdraw from the Paris climate agreement and the IRA (Inflation Reduction Act) will partially reverse. Trump has also criticized Big Tech following the “deplatformization” of conservatives, but he also wants to protect the sector to prevent Chinese tech companies from taking over.
At the same time, banks and traditional energy sectors, including oil and gas, could see positive effects from deregulation and protectionist policies. This could lead to more mergers and acquisitions, which would be beneficial for US small caps. In Europe, consumer sectors (e.g. retail, grocery, spirits) and large trade-oriented banks are most at risk, while sectors such as construction and manufacturing could benefit from increased onshoring and reshoring trends under a Republican administration. For the bond markets, the consensus is that the increased budget deficit and higher inflation will lead to higher interest rates. However, this impact may be limited if it is accompanied by lower economic growth. In this scenario, gold could reach new all-time highs.
Regardless of the outcome of the US elections, we expect a lot of liquidity to come to the market next year. On January 1, the US government will reach the debt ceiling and no new debt can be issued. The Treasury Department will have to spend $700 billion from the general account – taking money from outside the banking sector and adding it to bank reserves. The Fed will QT (tightening of monetary policy ed.) likely to be phased out in the first quarter of 2025, which will reduce the shrinkage of the Fed’s balance sheet. Together we can count on $1 trillion in gross liquidity in the first half of 2025.
This is a contribution from Bruno Lamoral, portfolio manager at Degroof Petercam Asset Management (DPAM).
Welcome, ladies and gents, to another thrilling episode of “What If?”—the game show where the stakes are higher than your uncle’s blood pressure during a Thanksgiving dinner debate! Today, we’re diving into a scenario that could make or break your investment portfolio: the unpredictable world of US elections. Grab your crystal balls, stock tips, and maybe a bourbon or two, because we’re about to explore what might happen if Kamala Harris or Donald Trump becomes the next President of the United States. Spoiler alert: It’s not just a matter of who has the better hair!
What If Harris Wins? Buckle Up!
Now, folks, let’s paint a picture: a Harris victory. The polls say one thing, betting markets another—it’s like trying to pick the right horse at the races while being blindfolded. But if Harris manages to strut the victory lap, she might bring her own unique brand of chaos. Here’s the kicker: we could end up with a divided parliament. Yes, folks, that sounds about as fun as a family reunion with that one relative who insists on discussing their 17 cats.
With a divided parliament, any *major* changes to economic policies could be virtually non-existent. Don’t get your hopes up for wild spending sprees or outrageous taxation ideas (well, at least not yet…). Harris has some big plans brewing, especially ones aimed at *tax reform*. Think higher taxes on the wealthy and slapping a tax on stock buybacks like it’s a late fee at Blockbuster!
But wait! Here comes the real zinger—the proposed hike in corporate tax rates from 21% to a whopping 28%. That’s like running a marathon where every mile marker says, “You’ve got this—just kidding, try again next year!” It could chop off 6% from S&P500 profits, and we all know how the market hates to wake up grumpy. So an outright Democratic win could lead to a bout of the “bear” blues—completely opposite to Harris’ desire for a “happy” stock market. I imagine Wall Street reacting like a kid who just found out their birthday cake is carrot instead of chocolate.
But fear not, dear investors! The “less likely” scenario that involves a divided Congress means markets might respond with a wave of relief, bringing back that sweet, sweet optimism we all crave—like a pat on the back from your favorite teacher.
What If Trump Wins? Hold Onto Your Stocks!
Now, let’s switch gears to the orange titan himself—Donald Trump. If he takes the reins again, you better believe the markets are in for a wild rollercoaster ride! Think reduced corporate tax rates (hello, 15% corporate tax—let’s roll out the red carpet!). But before you pop the champagne, hold your horses. The flip side includes a cocktail of high tariffs and a hardline immigration policy that could have inflation soaring higher than your cold friend’s expectations at a summer BBQ.
Imagine the news: “BREAKING: All imported goods now come with a side of inflation!” You might want to stock up on that overpriced avocado toast because tariffs on Chinese goods could jack prices up to levels that make a mortgage look like pocket change.
Industry-wise, expect a reshuffling of cards. The renewables sector? Probably going to feel like that friend who shows up to the party only to find out it was a costume party—they just won’t fit in. Energy and traditional banking might have a field day though, thanks to Trump’s love for deregulation. So, small caps, hold on to your hats because M&A deals may be popping off left and right!
As for Europe? Let’s just say if you’re in retail or trade-oriented banking, you might want to pull out a life raft. Because if Trump wins, we’re sailing through treacherous waters! Meanwhile, bonds could get a shock with rising deficits and interest rates, although don’t count them out just yet—less growth could mean less madness.
And let’s not forget the golden prize—gold itself! If inflation ramps up, gold might just hit those all-time highs we’ve been dreaming about while nursing our financial hangovers.
Regardless of whether you’ve painted your house red or blue—and let’s be honest, it looks more like a Jackson Pollock painting right now—we’re all bracing for a massive liquidity wave that’s heading our way! With a debt ceiling approaching, get ready for that sweet government cash-making machine to couple with an ego the size of a football field!
This insightful gem comes to you courtesy of Bruno Lamoral, the Portfolio Manager at Degroof Petercam Asset Management (DPAM). So whether you’re Team Harris or Team Trump, remember: invest wisely and don’t let politics rain on your financial parade!
This styled article keeps the cheeky tone while addressing the market implications of the political landscape. Enjoy voicing your opinions—and may the odds be in your favor!
What are the primary risks and potential consequences for financial markets if Democrats, led by Kamala Harris, were to secure victory in the upcoming US elections? Conversely, how would the markets react in the event of a Republican win with Donald Trump at the helm? Which asset classes might thrive in these scenarios, and what implications would they have for overall asset allocation? Bruno Lamoral, Portfolio Manager at DPAM, provides valuable insights in this article.
What if Harris wins?
The national polls for the American elections currently show Kamala Harris slightly ahead of Donald Trump, but betting markets tell a divergent story. This uncertainty makes it challenging to predict the election outcome. Historically, in both 2016 and 2020, Trump underperformed in the polls yet managed to secure unexpected victories. If Harris were to win the presidency, there is a significant probability that she would confront a split Congress. This situation appears to align with market expectations as a balanced parliament would likely result in minimal alterations to prevailing economic policies, fostering stability.
If Kamala Harris secures the presidency alongside Democratic control of both the Senate and the House of Representatives, significant shifts in tax policies are anticipated. Her ambitious tax reform agenda includes proposals for a minimum tax framework and increasing the long-term capital gains tax for high earners, as well as significantly escalating the tax on stock buybacks. The most impactful of these proposals would be raising the corporate tax rate from 21 to 28 percent, an alteration that could compress S&P 500 company profits by approximately 6 percent, imposing a considerable headwind on market performance. This agenda stands in stark contrast to Trump’s proposal for a reduced corporate tax rate of 15 percent, which could stimulate economic growth.
Additionally, Harris’ campaign emphasizes fighting inflation—an area where President Biden has faced criticism. One controversial proposal is to implement a federal ban on price increases by supermarkets, which has met substantial pushback from economists. They argue that price controls rarely achieve desired outcomes and are particularly unnecessary given the current trend of declining inflation. Consequently, Harris’ plans regarding the rental market have diminished her attractiveness to Wall Street investors. In light of this, she is attempting to bolster her pro-business stance by expressing support for fair and free market principles. Nevertheless, her fluctuating rhetoric and inconsistent positions on trade and geopolitical matters create additional uncertainty.
Given these factors, a decisive Democratic victory could trigger a negative reaction from the stock market. However, the likelihood of such an outcome appears diminished, as many of Harris’ proposals would require substantial legislative backing. Therefore, a divided Congress could potentially lead to a more favorable environment for market stability, as it would limit drastic changes across asset classes.
What if Trump wins?
A Republican win, especially under Trump’s leadership, could profoundly influence the economy and various asset markets. The proposed reduction of corporate tax from 21 to 15 percent is expected to positively sway stock markets. However, the adverse effects of rising tariffs and a strict immigration policy could elevate inflation levels and stifle economic growth. Specifically, a proposed 60 percent tariff on Chinese imports and a 10 percent tariff on other global imports would push tariffs to their highest levels since the Great Depression, adversely affecting major trading partners like China and Europe, both of which maintain substantial trade surpluses with the US. Consequently, US markets could also grapple with challenges stemming from increased prices due to these tariffs and elevated domestic production costs, complicating the economic landscape further.
Trump’s administration is likely to instigate notable shifts within various asset classes. The renewable energy sector has already lost value in anticipation of a potential exit from the Paris climate agreement and modifications to the Inflation Reduction Act. Trump’s critical stance on Big Tech—stemming from alleged conservative “deplatformization”—further complicates the sector’s outlook, despite his intention to protect it from foreign tech competition.
On the other hand, sectors such as traditional energy, including oil and gas, are poised for potential benefits due to deregulation and protectionist measures that could stimulate mergers and acquisitions within US small caps. Consumer sectors in Europe, including retail and food, along with large trade-focused banks, face significant risks. Conversely, industries anchored in construction and manufacturing could reap advantages from increased onshoring under Republican governance. The bond market consensus suggests that a rising budget deficit combined with higher inflation may lead to increased interest rates, although this trend could be tempered if economic growth falters. In such a scenario, gold prices could surge to record levels.
In either electoral outcome, a surge of liquidity is anticipated in the markets next year. The US government is set to reach its debt ceiling on January 1, restricting any new debt issuance. This situation will necessitate the Treasury Department to withdraw $700 billion from the general account, reallocating funds outside the banking sector to bolster bank reserves. Moreover, the Federal Reserve is expected to wind down its tightening of monetary policy, particularly in the first quarter of 2025, potentially reducing the contraction of its balance sheet. Altogether, we can expect to see an influx of approximately $1 trillion in gross liquidity during the first half of 2025.
This analysis is provided by Bruno Lamoral, portfolio manager at Degroof Petercam Asset Management (DPAM).
