The upcoming US election and the impact on markets

Key takeaways

• Various policy proposals in this election cycle do suggest different economic outcomes.
• Near-term volatility is likely as the election approaches.
• But we think politics is an unreliable driver of market performance. While government policies can drive some investment outcomes, they are just part of a broader basket of market drivers.
• Historically, factors such as interest rates and economic growth have tended to have a bigger impact.
• We suggest focusing on portfolio diversification across equities and fixed income, and remaining invested through any near-term volatility.

The US election outcome is close.

The US election is looming over global economics and markets. The presidential race remains tight between Kamala Harris and Donald Trump. National polls and betting markets have the odds very evenly balanced. While a lot can change in the final stretch, prediction markets have the two most likely outcomes as a Republican sweep or a Harris presidency with a divided government – with Republicans holding the Senate.

The lead up to the early-November vote could see more volatility as investors try to front run outcomes. Key policy decisions could have economic implications that could impact investment markets. There are four key economic areas that we think could be potentially impacted by the election result. These are tax, regulation, trade and fiscal policy.

Chart 1: Prediction markets have the outcome evenly poised.

Source: Bloomberg LP.

Focus on the key policy differences.

Historically, political outcomes have had relatively limited impact on medium-term to long-term economic and market outcomes. This has changed somewhat over the past decade – Brexit in 2016 and President Trumps victory the same year are examples where significant policy differences had an impact. For the 2024 election, there are some material policy differences that we think could impact economic outcomes. Table 1 shows these potential differences.

Table 1: Key policy differences across key economic areas.

Source: Bloomberg LP, Ascalon.

Policy intentions do not equal market outcomes.

It is not always easy to connect policy intentions with market outcomes. Government policies are just one part of a broader basket of market drivers and, historically, factors such as interest rates and economic growth have tended to have much greater impact.

For example, in 2016 the consensus expectation was that energy would thrive under a President Trump administration. In fact, it was one of the worst-performing sectors over his four-year term. Under President Obama, healthcare was expected by economists to be a tough sector, but it performed well on a relative basis.

Some potential high level market implications.

In broad terms, there is a risk that Harris’ tax hikes could weigh on consumer spending and corporate investment, compared with ex-President Trump’s tax proposals. An increase in taxes could reduce earnings growth and weigh on equity prices. In contrast, the Trump tax policies are broadly seen as more favourable for equities. Similarly, corporate credit could perform better under Trump than Harris.

The US fiscal position looks set to worsen whoever wins the election. This could put upwards pressure on US Treasury yields, compared with a government focused on fiscal prudence. But we think that monetary policy will be key driver of Treasury yields – and we expect the US Federal Reserve to continue to reduce rates over the near-term and medium-term.

How can investors prepare for the outcome?

Historically, US equity market volatility has increased in September and October ahead of November elections as election uncertainty rises. And that has often given way to a relief rally immediately following the election outcome. We think it best to look through this near-term volatility.

It is also worth emphasizing policy positions are subject to change. It is not clear which policies would be prioritized, and it is not clear that Congress would cooperate in implementing them. As such, while various policy proposals in this election cycle would seem to suggest different market outcomes, we continue to expect politics to be an unreliable driver of market performance.

We think an appropriate preparation for the election outcome is to focus on portfolio diversification across equities and fixed income, and remain invested through any near-term volatility.