US Presidential election: risks and opportunities

The fourth quarter of an election year is normally associated with above-average equity market volatility (see Figure 1). In terms of broader market impact, we have identified a framework to help think about the investment risks and opportunities inherent in each candidate. It is instructive to think about both domestic and overseas dimensions.

i. Domestic policy

Kamala Harris is the continuity candidate and as such the impact of her winning is likely to be market neutral or marginally equity market negative. For example, Harris has discussed increasing corporation tax and capital gains tax, both of which would reduce the attractiveness of US equities, even if such tax hikes would be difficult to implement in practice. In broad terms, there would be little change from the current administration and, with Harris now favourite to win, this is the outcome that markets are pricing in.

The big risk if Harris wins is that Trump’s supporters refuse to accept the result and there is widespread civil unrest. This is not the central view but it is a genuine risk. The market impact of such an outcome depends on how many cities are affected, for how long the protests go on and the nature of the protests. If the protests remain peaceful and restricted to a few rallies that quickly fizzle out then the market impact would be minimal. However, there is a small non-negligible probability that protests gather momentum, negatively impacting the US economy. This would be associated with an increase in market volatility and risk premia. In such a situation the Fed would be expected to implement some emergency rate cuts as an insurance mechanism.

Trump’s agenda is expected to be more pro-growth than Harris’s – lower taxes in particular – which would be positive for equities, at least in the short run. Indeed, it is notable that there has been a positive correlation between Trump’s odds of winning and short-term equity market performance, as shown in Figure 4. While the budget deficit is expected to remain elevated regardless of who wins it will be even larger under a second Trump administration. That would be negative for US Treasuries, putting a floor under longer term US Treasury yields. Higher rates and yields would be positive for the US dollar, despite talk from Trump and his running mate JD Vance that a weaker dollar is desirable.

ii. Foreign policy

A separate set of risks stems from the foreign policy outlook under each candidate. If Harris wins there would be little change: ongoing support for Ukraine and Israel but with increasing conditionality and push-back from some US domestic quarters regarding funding.

If Trump wins the situation is more nuanced. Trump has said he will force a resolution in Ukraine very quickly. This has no doubt influenced Ukraine’s decision to initiate a land grab in Russia as a means of bolstering their bargaining position. Regardless of the moral issues and whether Trump would be able to do what he says, an end to the war would likely be a small net positive for global equity markets as it would result in a reduction in the risk premium. However, based on his previous administration, Trump would at the same time likely increase support for Israel, something that may exacerbate problems in the Middle East.

Trump has also been vocal in his dislike of America’s trading relationship with China and has threatened to impose large tariffs on Chinese imports. China would be expected to retaliate. This would be inflationary for the US and negative for those companies that export to China or that are reliant on imports from China as part of their supply chains.

A separate issue on which Trump has been outspoken is his desire to see European countries contribute more to their defence budgets. If he carries through with threats to withdraw support to those countries that do not, in his opinion, contribute enough to their own defences, that could prove expensive for Europe. Some European countries have already committed to increase defence spending and on balance this will result in large budget deficits so be negative for European bonds.

Our thoughts on the high-level impact of each candidate are summarised in the Appendix.

Conclusion

Whilst much uncertainty remains, there are several messages we draw from the current state of play with regards to the US Presidential election. In summary:

• US Presidential election years normally see an increase in volatility in the fourth quarter and there is no reason to believe this year will be any different. In the short run this will likely act as a headwind to markets. However, once the election is out of the way, the focus will return to fundamentals.
• A Trump win could be short-term positive for equities while a Harris win would be marginally equity market negative due to tax hike policies.
• Regardless of which candidate wins, the budget deficit will remain unusually large, putting upward pressure on government bond yields. The deficit would be larger under a Trump administration, which would be an added risk factor for bond markets.
• Several factors impact the foreign policy outlook. Perhaps the most significant one for markets relates to the trading relationship with China. At a macro level, tariff increases would be inflationary and a headwind to growth. At a micro level, there are particular areas of the economy that are more heavily exposed to China than others, either as a demand destination or as part of the supply chain network.

Much of the above is educated guesswork and there are many interacting factors. Additionally, the ability of the President to implement policies will depend on the split of control across the House and the Senate. Even in the event of a clean sweep for one party, that by no means guarantees universal support for the party’s policies. If the majorities are slim, it would only take one or two dissenting Representatives or Senators to thwart planned policy initiatives. Furthermore, there have already been several unexpected twists and turns in this election and there will no doubt be more between now and 5th November. Whilst Harris is currently in the ascendancy, a lot that can happen between now and election day.

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