Countries accounting for almost half of the world's population will hold elections this year, but as far as the financial markets are concerned the US presidential election, scheduled for 5 November, is by far the most important. Not only is the US the world’s largest economy and the US dollar the most widely used reserve currency, it’s also comfortably the biggest stock market with 71% of the MSCI All Country index made up of US equities[1].
Although US politics has undoubtedly become more deeply divided in recent years, from an investment point of view it’s imperative to look past the polarisation and divisiveness and focus on economic policies. Before looking at the proposed policies of the two presidential candidates, Donald Trump and Kamala Harris, it is worthwhile pointing out how much closer the race for the White House has become in recent months.
No foregone conclusion
Earlier in the summer Donald Trump had opened up a significant lead over the incumbent Joe Biden, to such an extent that markets were already seemingly starting to price in a Republican victory. The landscape has changed substantially since then, as Biden’s decision to not run and endorse his vice president has seen Kamala Harris narrow the gap and even overtake Trump according to some polls. There is still some way to go until election day, but it now appears far more likely that this will be a closer run thing and no foregone conclusion.
Generally speaking, Trump is viewed as a proponent of deregulation and lower taxes (both seen as market positive in the near term) but also known for his unpredictable nature and fondness of imposing tariffs (both seen as market negative).
Harris has no longstanding ties to Wall Street and Silicon Valley, raising hopes among business leaders that she might adopt a less onerous stance than Biden from a corporate perspective on competition, financial services and employment.
The Democratic nominee has announced plans to increase taxes that are estimated to raise US$5tn over a decade. Harris has committed to stick to Joe Biden’s proposal to raise corporation tax to 28% from 21%, whereas Trump proposes cutting it to 15%. Harris’s plan would also target the wealthiest individuals with those worth more than US$100m paying taxes of a minimum of 25% on a combination of their income and unrealised capital gains — covering stocks, investments in start-up companies and real estate.
Most corporate leaders have largely refrained from stating their opinions, at least publicly.
The lack of public support for either side should not be taken as a sign that the outcome is unimportant to corporations — it is far more likely a case of CEOs judging there to be limited upside to endorsement announcements and potentially significant downside. The latest US earnings season saw over 300 companies mention the upcoming election on calls, almost twice as many as in the corresponding period in 2020, according to analysis by AlphaSense.
Tech, Responsible Investing and Healthcare
The Magnificent Seven stocks (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) have dominated not just US equity markets but global benchmarks over the last year. Kamala Harris would be expected to follow Biden’s lead, providing additional subsidies/incentives for US semiconductor -manufacturing and support domestic production.
Participation in tax discussions with the Organization for Economic Co-operation (OECD) is a clear dividing topic for both candidates, with Harris expected to maintain engagement and keep current suspensions of digital services in place whereas Trump would seek to exit these talks and threaten reimposing suspended digital service taxes.
Companies currently benefitting from the Biden administration’s Inflation Reduction Act (IRA) and Chips & Science Act could be especially sensitive to the election outcome. There are concerns that a Trump victory might lead to attempts to undo much of these measures designed to fight climate change, instead supporting fresh efforts for fossil fuel production. These two landmark pieces of legislation contain over US$400bn in tax credits, loans and grants, extending until 2032 aimed at growing cleantech and the semiconductor supply chain in the US.
Uncertainty around the US election and slowing demand has already led to approximately 40% of the manufacturing investments announced in the first year of the IRA to be delayed or paused. That said, a number of the delayed projects have been relocated to red states in an attempt to garner Republican support.
As the world’s largest oil producer, the US oil industry is an area of keen interest. Kamala Harris has come under pressure of late for clarification on her energy and climate policy, as she seeks to carve out a position between that of Biden and Trump. Trump has laid the blame for higher fuel costs at the door of Biden and Harris, with his advisers stating a desire to make substantial changes to the IRA — pledging to cut regulation and remove clean energy subsidies.
Pennsylvania has become a battle ground for energy policy, due to its largescale shale gas production. Identified by political experts as a potentially key swing state, Harris is looking to take a more fossil fuel-friendly approach to attract support and ensure that Biden’s narrow victory in 2020 is not reversed. Recently Harris stated that she no longer supported a ban on fracking, but it is not clear whether this will be enough to win over Pennsylvania’s blue-collar workers.
On Healthcare, both candidates have announced plans to reduce drug prices. Trump has said he will accelerate efforts to privatise Medicare, reducing hospital payments for outpatients and the Medicare Advantage payments to insures. Rather than reduce Medicare, Harris would seek to expand it, raising the US$2,000 cap on out-of-pocket Medicare prescription costs to all Americans, expanding the number of drugs subject to Medicare price negotiations and extend the inflation cap to private-sector drugs.
In summary, the forthcoming US election poses a potentially major market event, with its impact felt all around the globe. With the outcome far from certain financial markets are unlikely to heavily discount one outcome over the other, meaning that volatility could well be heightened around election day. Kamala Harris has sought to attract undecided voters by positioning herself as more centrist compared to Donald Trump and her recent performance in their debate was widely seen as impressive and authoritative.
Trump continues to polarise opinion and even though he has held office previously is viewed by some as less predictable and more of an unknown quantity. Technology, Healthcare and Energy are three sectors where the candidates express notably different views, and we would expect to see some of the clearest winners and losers from the election in these areas. US Treasuries are also potentially sensitive to the outcome and concerns regarding the fiscal deficit and the funding thereof going forward could impact not only US government debt yields but also fixed income markets globally.
[1] Global dominance of biggest stocks rises to highest in decades (ft.com)