The economic implications of potential outcomes in the upcoming US presidential election are being closely monitored by analysts. The current macroeconomic environment is characterized by robust GDP growth, positive corporate earnings, and a Federal Reserve poised to cut interest rates. However, the uncertainty surrounding the election results adds complexity to the financial landscape.
This outcome could lead to substantial shifts in the market. It is likely to result in an extension of the Tax Cuts and Jobs Act (TCJA) and potentially lower corporate tax rates, stimulating economic activity. However, increased tariffs and a more stringent immigration policy could introduce negative supply shocks, leading to upward pressure on inflation and complicating growth prospects. US equities are expected to outperform, but the magnitude of this performance may be tempered compared to a scenario where a Trump administration operates with a unified government.
Overall, a Republican Sweep could have both positive and negative effects on the economy.
The economic implications would largely reflect a status quo. This scenario is anticipated to yield bipartisan support for extending most provisions of the TCJA, with exclusions for high-income earners. Harris's proposals for a higher corporate tax rate and enhanced child tax credits are unlikely to gain bipartisan backing, resulting in a net fiscal impulse that remains close to neutral. The markets may not react significantly to a Harris administration, although a potential unwinding of recent market gains driven by "Trump anticipation" could occur. International equities, currently undervalued compared to their US counterparts, may experience a relief rally due to reduced tariff risks. The US dollar and yields could decline in this scenario, further influencing market dynamics. Despite the challenges for Democrats in the Senate, a Harris presidency with divided government suggests a relatively stable economic environment, albeit with limited fiscal expansion.
A Harris presidency with a divided government would likely maintain economic stability.
This scenario, where Democrats control both the presidency and Congress, is considered the least likely outcome. Such a scenario would likely lead to a wider budget deficit than in a divided government, although narrower than under a Republican Sweep. Increased spending plans would be partially offset by tax hikes on high-income households and corporations. The risks associated with a Blue Sweep extend beyond fiscal prudence and encompass policies that could be perceived as unfavorable to US equities. A weaker dollar, driven by reduced tariff risks, might provide some relief, but higher corporate taxes could dampen company earnings. This combination of factors raises the likelihood of US equities underperforming relative to international markets. Initial jitters in yields may arise from concerns over a wider deficit, but assurances regarding tax increases funding spending could present a buying opportunity for duration.
A Blue Sweep could have negative implications for US equities and company earnings.
As the election noise intensifies, it is crucial to maintain focus on the broader economic picture, which remains favorable for risk assets. Historically, equities have tended to rally into year-end, regardless of election outcomes, as policy clarity emerges. In most scenarios, except for the unlikely Blue Sweep, US equities are expected to perform well for the remainder of the year. Emerging markets, in particular, may benefit from a Harris victory due to reduced tariff risks, while international equities could outperform in a divided government scenario.
The recent uptick in yields has opened up value opportunities for duration, although the risks associated with a Republican Sweep suggest a cautious approach before increasing exposure. In the foreign exchange market, preferences for the Japanese yen and select emerging market currencies like the Brazilian real and South African rand are advised. However, hedging broad emerging market exposures with long USD positions against the Chinese yuan and euro is prudent, given the anticipated rise in tariffs under a Trump administration.
As the election approaches, the interplay between political outcomes and economic performance will be closely scrutinized by investors. The potential for market overshoots necessitates a strategic approach to risk management, allowing for the capitalization of opportunities that may arise from the evolving political landscape. With a healthy economy and positive earnings outlook, the stage is set for a dynamic market environment, regardless of who ultimately takes the helm in the White House.