How could the U.S. elections impact financial markets?

What is Kamala Harris’ stance on the U.S. economy?

Investors seeking continuity in U.S. economic policy will find common ground with Vice President Kamala Harris. Her views align with President Biden’s approach on issues such as tariffs, tax, and spending. Environmental and green energy initiatives will remain a priority, while she would probably seek to raise taxes on corporations and wealthy individuals.

Our RBC colleagues in the U.S. highlight that Harris would lean slightly more towards the progressive wing of the party than Biden, who is known as a centrist. Indeed, Harris has said that building up the middle class will be the defining goal of her presidency. This may lead to greater emphasis on workers’ rights and union support, potentially prioritising them over business interests. She would also push for increased spending in areas like education, healthcare, affordable housing, and childcare.

It’s worth noting that many of the tax cuts signed into law by Donald Trump in 2018 expire at the end of next year. Like Biden, Harris has suggested she would favour making the tax cuts permanent for workers earning less than $400,000 per year, while reversing the cuts for higher income earners to pre-2018 levels.

Does Harris entering the race give the Democrats a better chance of winning?

In short, yes.

Trump has his hardcore supporters. But his broad appeal is limited, and his favourability rating remains fairly low. With the right candidate he is beatable, as was proved in 2020.

But is Harris the person to defeat Trump?

Replacing Biden certainly seems to have energised the party. Donations have surged. The money will go towards paying for the media time required to convince a now much larger group of undecided voters to vote for her.

The performance of the U.S. economy between now and election day (November 5) will be crucial for the Democrats. Americans have been dissatisfied with the economy, and much of that is is linked to inflation. The good news is that inflation has decelerated, with the annualised three-month rate of change of the U.S. core consumer price index – a key measure of changes in purchasing trends and inflation – now down to 2%. If the inflation numbers can remain subdued up to election day, this will help Harris.

However, Harris will need to change voters’ perceptions about her role in managing the high levels of illegal migration into the U.S. Several high-profile Republicans have branded her Biden’s “border czar”. Democrats would argue that this is an unfair label, as she was tasked with investigating the root causes of elevated levels of migration from Central America (the Homeland Security Secretary oversees the border). Another big flare up on the border with Mexico between now and the election will not help Harris’ cause.

What if Trump wins? How would his policies affect financial markets?

If Trump wins, his policies could significantly affect financial markets. He would seek to make permanent all of the 2018 tax cuts, including those for high earners, and likely try to lower the corporate tax rate from 21% to 15%. Trump would also reduce regulation, particularly in financial services and fossil fuel energy, and adopt a more business-friendly approach to antitrust than Harris. He is also likely to be much tougher on immigration.

On trade, Trump’s stance with China is a concern. He’s threatened a 60% tariff on imports from China, a substantial escalation from the 10% to 25% tariffs imposed in his first term.

Biden has also been tough on China, keeping many of his predecessor’s tariffs in place, as well as beefing up export controls and imposing new tariffs. We could expect more of the same if Harris wins, but it’s probably fair to assume that the U.S.’ relationship with China would be less volatile under her leadership than under Trump.

Where Harris and Trump really differ on trade policy is their treatment of other countries. Trump has threatened a tariff of 10% across the board, including on U.S. allies.

Trump’s agenda also includes several “non-standard” measures. He may seek to redesignate civil servants as political appointees, replacing perceived adversaries with loyalists. Trump has also vowed to bring regulatory agencies, including the Federal Trade Commission and the Federal Communications Commission, under his authority. Finally, the risk of Trump attempting to influence monetary policy is much higher than it would be under Harris.

What about the U.S. government’s rising $35 trillion debt?

Under Trump, unfunded tax cuts were passed. Under Biden, unfunded spending has occurred. Yet neither Trump nor Harris see reducing the record $35 trillion debt as a priority. Nevertheless, absent a sharp economic slowdown, we doubt there is much scope for unfunded tax cuts or spending this time around.

The U.S. bond market could react negatively to excessive deficit growth (remember the reaction to Liz Truss’ mini-budget?), which politicians from both parties will want to avoid. Moreover, reducing the budget deficit has become more of a priority for Americans.

How important are the Congressional elections?

Despite the focus on the presidential election, voters will also be choosing new members of Congress (where laws are passed) when they fill their ballots.

The U.S. president has lots of scope to do as they please when it comes to trade and foreign policy, but laws on spending and taxation must be approved by both Chambers of Congress before being signed into law by the president. As such, if Trump or Harris win but their party does not control both the House of Representatives and the Senate, very little in the way of new legislation is likely to be passed, especially considering the deep divide between the Republicans and Democrats.

Even in a unified government, where the president and a majority of Congress are from the same party, not all of Trump or Harris’ policy agenda is likely to be implemented. This is because the race for the House of Representatives is likely to be close, and the winning party will have centrists unwilling to support the more extreme parts of the president’s policy agenda.

How will a Trump or Harris presidency affect investments?

Equity investors would likely welcome a deregulatory push, further corporate tax reduction, and making the 2018 tax cuts for high-income earners permanent, all of which could potentially be implemented under a Trump administration. However, the likely rise in trade uncertainty and the potential for an all-out global trade war would be a major turn-off.

Trump’s trade and immigration policies could also result in higher inflation and therefore more restrictive monetary policy than under Harris. His interference with the civil service and the Federal Reserve could also make equity investors somewhat uneasy.

While there are clearly moving parts, our sense is that the best result for equity investors would be a Harris win without Democrat control of Congress. In this scenario, the risk of a damaging global trade war drops sharply, but the Republicans would block any new proposed tax hikes from being legislated.

While politics and fiscal policy drive market direction, other variables including the stage of the economic cycle, monetary policy, sentiment, and valuations, are also key drivers of investment performance.

We continue to believe there is scope for global equities to keep moving higher. While economic growth is slowing, we suspect corporate profits will continue to advance over the medium term.

The value of investments, and any income from them, can fall and you may get back less than you invested. This does not constitute tax or legal advice. Tax treatment depends on the individual circumstances of each client and may be subject to change in the future. Neither simulated nor actual past performance are reliable indicators of future performance. Investment values may increase or decrease as a result of currency fluctuations. Information is provided only as an example and is not a recommendation to pursue a particular strategy. Forecasts are not a reliable indicator of future performance. We or a connected person may have positions in or options on the securities mentioned herein or may buy, sell or offer to make a purchase or sale of such securities from time to time. For further information, please refer to our conflicts policy which is available on request or can be accessed via our website at www.brewin.co.uk. Information contained in this document is believed to be reliable and accurate, but without further investigation cannot be warranted as to accuracy or completeness.