US election – what it means for the economy and markets

Will the White House be blue or red?

There are two main political parties in the US: the Republicans – represented by former President Donald Trump – and the Democrats – represented by existing Vice President Kamala Harris. At the time of writing, the polls are fairly split down the middle as to who is favourite to win. Since their live TV debate in mid-September – which Trump has said would be their last – Harris is marginally in the lead as favourite.

With that said, Trump is polling better than he did in 2020 against current President Joe Biden, and in 2016 when he went on to win the election. This coincides with Harris being less popular than Biden during his winning election campaign. 

If you’re not first, you’re last

Trump and Harris have very different proposals for how they would run the country. Trump would return to his ‘America first’ style of governing, creating a strategy of self-dependence for the US, whereas Harris would want to continue in Biden’s footsteps and maintain strong relationships with global allies.

David explains: “The US has a lot of resources that Trump wants to utilise. To stimulate fiscal growth, he would implement significant tax cuts while pulling back from international trade, using America’s economic and military power to leverage concessions from the global market.”

Having taken a blunt approach to trade previously, Trump has suggested he might introduce tariffs on all imported goods of at least 10%, singling out China with a potential tariff of 60%.

Harris on the other hand wants to take a different approach by increasing taxes for corporations and the ultra-wealthy. This would be used to fund social spending. With regards to tariffs on imported goods, she would cut these costs to win concessions and maintain strong relations.

A couple of other proposed changes by Harris would be to raise long-term capital gains tax to 28% (up from 20% yet significantly lower than Biden’s proposed 39.6%) and share buyback tax upped from 1% to 4%. This would be a bid to appeal to a wider voter base by balancing the normative views of the Democrat party.

How will markets react?

Under a Harris Presidency and Congress, it would seem very much business as usual. Sharing similar plans and beliefs as Biden, there would not be any shocks to the economy or markets. For Trump on the other hand, having an inward facing plan could have more of an impact for investors.

Currency and fixed income markets could go higher along with steeper interest rate curves. Trump’s proposed tax cuts would potentially strengthen the dollar and benefit sectors such as banks and energy. But he doesn’t actually appear to want a strong dollar as he believes it could interfere with a revival of the US manufacturing industry. 

It’s just politics

In terms of how markets will move in the lead up to election day, there could be some fluctuations as investors price in either candidates’ scenarios. But this would likely only cause short-term volatility. While political elections matter, they “don’t actually matter for company earnings”, says David.

“Over the long term, politics has no meaningful impact on corporate earnings and therefore little power over stock market performance,” he says. “Instead, long-term investors should prioritise productivity growth and monetary policy.”

Post-election, equity markets have tended to perform similarly in the past regardless of what party wins. For the past 150 years, the US equity market has returned on average 7.3% a year under a Republican Presidency compared to 7.6% under a Democratic Presidency (adjusted for inflation).

With very little between the two candidates in the polls, the world is watching the US election with bated breath. But while the result could have a big impact on world trade and international relations, it shouldn’t cause too much drama for investors over the long term. Any volatility it does cause will likely only be temporary before investors turn back to the fundamentals. 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. You should continue to hold cash for your short-term needs.