The US election season is underway, and the runoff is set to feature two familiar candidates – the incumbent President Biden and the challenger, former President Trump.
This election is likely to be one of the most interesting in recent history, as a highly polarized electorate takes to the polls to elect one of two candidates suffering from high unfavourability ratings.
A Biden re-election will be viewed as a continuation of the status quo, while having Trump back in the White House could ultimately bring greater uncertainty to markets, given his lack of electoral constraints and inability to run for a third term.
We assess the primary differences between each candidate’s policy platform and highlight the policy implications for financial markets, particularly regarding trade, tariffs, and taxes.
With both candidates focusing on American competitiveness and likely to oversee substantial deficits (although with different beneficiaries), their policies are likely to be inflationary. This raises risks around the medium to longer term outlook for interest rates and the economy.
Who’s Ahead? Predictions and Polls
Americans view both major party presumptive presidential nominees more unfavourably now than any of the past 10 elections. 30% have an unfavourable opinion of both candidates, with this view especially prominent amongst voters aged 18-29 (41%) and those without strong party affiliation (36%). Part of the reason is increased polarization, but the age of the candidates is also a major factor. At 81, Joe Biden will be the oldest ever presidential candidate, while Trump is not far behind at 78.
The first presidential debate that took place on the 27th of June had two key consequences. Firstly, it increased the likelihood of a Trump victory in November, along with the prospects of a Republican sweep. Secondly, it increased uncertainty over whether Biden will be the Democratic nominee.
Bedtime for Biden?
Biden is rapidly losing the support of Democratic lawmakers and candidates who are concerned his continued candidacy could lead to a Republican sweep and an unchecked Trump presidency. Election betting markets currently place an equal probability to Vice President Kamala Harris as Biden as the Democratic nominee.
Given this drastic repricing, it’s likely a decision will be made in the coming days if not weeks, with the formal nomination process also being brought forward from August to July.
A new Democratic candidate would no doubt reset November election expectations. If it is the current front runner Harris, this would result in the smoothest transition scenario, as she is likely to campaign on the same policy platform as Biden and would have immediate access to Biden’s campaign funds. A Harris nomination and general election victory would be largely viewed as a continuation of the status quo from the market’s perspective. For now, a Biden-Trump rematch remains the base case.
Trump 2.0: Trade, Taunts, and Tariffs
Trump has been campaigning on the premise that he will move to impose a 10% tariff across-the-board and a 60% tariff on imports from China. Under these policies, the US tariff rate would increase to nearly 17% from its current level of 3%, which is the highest tariff rate since the 1930’s. This would be accomplished by passing the “Trump Reciprocal Trade Act”.
Trump’s tariff proposals need to be taken seriously, given that much can be done without the assistance of Congress. The Trade Act permits the executive to impose aggressive trade remedies on countries seen as engaging in unfair trade practices, especially related to strategic goods (which now includes almost everything). It also permits trade restrictions on national security grounds, another area which is now being interpreted extremely broadly.
These sections were cited by President Trump in 2018 when he imposed tariffs on steel and aluminium.
On the other hand, a second Biden term would largely represent a continuation of the status quo regarding trade and tariffs. Biden’s decision not to unwind Trump’s tariffs is a clear acknowledgment that voters are sceptical of free trade, especially after so many manufacturing jobs were moved offshore in recent decades. Furthermore, in his State of the Union speech on March 7 Biden emphasized standing up “against China’s unfair economic practices.” One policy difference though is that Biden would likely refrain from imposing new tariffs, instead favouring industrial policies to encourage domestic manufacturing and the reshoring of production capacity.
On balance, Trump’s policies are likely to be more inflationary, given higher tariffs and hence higher import prices; sharply lower labour force growth through tighter immigration policies, and moves to weaken the Fed’s inflation fighting credentials.
Trump has repeatedly stated that he would not reappoint Fed Chair Powell, whose second term expires in May 2026 (Trump first appointed him in 2018). However, his ability to handpick a new dovish candidate is limited by the fact it requires Senate approval (a few moderate GOP Senators might refuse to confirm an unorthodox Fed chair). Additionally, presidents can only replace Fed chairs during their term “for cause,” and that would be a difficult case to make (and has never even been attempted before). All that said, extensive criticism and dovish pressure towards the FOMC could challenge the Fed’s independence and raise long-term inflation expectations.
The response of several assets to the sharp uptick in Trump’s probability of winning the election gives us a clue as to how markets might react if the former president were to prevail in November.
Markets may be underpricing the risk of a global trade war and long-term potential negative impact of broader geopolitical tensions between the US and China.
Even if Trump scales back some version of his current proposals, the outcome would still be worse than the 2018 tariffs. We’d expect a stronger US dollar, especially against the Renminbi, as China has been the biggest beneficiary of the hyper-globalization era. Other countries with a large bilateral surplus could see their economies and currencies face similar challenges.
Nonetheless, a period of trade policy uncertainty could potentially weigh on markets until greater clarity emerges. For example, the uncertainty caused by the 2018 trade war between the US and China stalled US business investment and led to a flight to quality globally. Amidst this period of trade policy uncertainty and a backdrop of tightening rate policies (the Fed hiked four times in 2018), the US dollar strengthened by 5% over the course of the year.
Fiscal Largesse to Continue, or Get Worse
Moving on from trade to fiscal policy, both candidates would probably oversee substantial deficits, although the beneficiaries could differ significantly. However, since Congress controls the purse strings, the next president can accomplish little without the support of both the Senate and House. If there is a one-party sweep, we are likely to see higher fiscal deficits.
Trump has promised to extend the personal tax cuts contained in the Tax Cuts and Jobs Act (TCJA) that are due to expire at the end of 2025, at a cost of $4 trillion over 10 years. Additionally, Trump has spoken about reducing the corporate tax rate further to 20% (from 21% currently), and expects to pay for these tax cuts through the increase to tariffs.
Biden, on the other hand, favours partial TCJA extensions with possible increases in corporate and higher-earner tax rates. He would like to raise the corporate tax rate from 21% to 28% and double the tax rate on foreign earnings to 21%. Discretionary spending reductions would be off the table and Biden, like Trump, has ruled out cuts to Social Security and Medicare.
The US debt now stands at more than $35 trillion, representing 122% of GDP. More than $20 trillion in new debt has been added in the past 14 years. It’s also becoming increasingly expensive to service US debt, with such costs projected to soon eclipse defence spending.
Unless one party sweeps congress, current attention on unsustainable fiscal expansion suggests there will likely be more political wrangling, and an increased potential for government shutdowns and debt ceiling standoffs. Whether driven by tax cuts or spending increases, there is likely to be inflationary pressure that results in higher long-term interest rate expectations and increased risk of a fiscal crisis at some point in the future.
We see value in gold as an inflation hedge from geopolitical shocks, including tariffs and mounting debt fears.
IRA, Yay or Nay?
A Trump administration would likely be more impactful for green energy, although in a negative direction. He has promised to repeal much of the Inflation Reduction Act (IRA), which includes subsidies and tax credits for battery manufacturing, clean power projects, and EVs. Although this sits near the top of his to-do list, it would require a Republican sweep to modify the 2022 legislation.
Trump has promised to expand fossil fuel production even further, by expediting the approval of new drilling/ pipeline projects and loosening regulations. While greater energy independence could help cushion the US economy from oil supply shocks, increased supply would weigh on prices, with crude oil production already at an all-time high.
Biden would see continued implementation of the IRA, a push for greater EV adoption and more solar and offshore wind production. He would keep downplaying fossil fuel production while targeting investments to cut greenhouse gas emissions 50% by 2030.
Interestingly, clean energy outperformed traditional energy during the Trump administration — a reminder that factors other than the president’s policy agenda often drive performance (Figure 6). One such factor was the pandemic during Trump’s term, which resulted in a steep decline in commodity prices and a sharp decline in interest rates that likely benefited clean energy businesses. During the Biden administration, the Russia-Ukraine war had the more prominent influence on oil prices despite a policy push for clean energy.
Timing Trumps All
In the case of a Trump victory, market direction will depend on the sequencing of his policy moves. If he runs with tax cuts first it could boost the economy in 2025, but if he runs first with sharp tariff hikes, immigration cuts and an attack on the Fed, then there could be a more negative impact initially. In 2017, he ran with the positives first to help shore up the economy, but this time around he may run with negatives first as there will be no constraint from the desire to win another election.
After Trump’s victory in 2016, US shares soared 38% to January 2018, as the focus in his first year was on business-friendly tax cuts and deregulation. However, in 2018 the market declined as the focus shifted to trade wars, compounded by the impact of Fed rate hikes. While the market’s direction over the coming year will be influenced more so by the Fed’s monetary policy backdrop, the sequencing of tariff hikes versus tax cuts will also be an important factor.
Markets Are Resilient Regardless of Who Holds Office
Historically, higher average annualized returns have occurred during a divided Congress, with lower returns seen during Democratic majorities in both the House and Senate, and higher returns under Republican control of both chambers. Nonetheless, the market has historically been positive under all six government compositions.
It's important to note that markets have largely been unaffected by US Presidential election outcomes. The direction of the market, regardless of the election result, is more likely to be driven by fundamental factors such as interest rates and corporate earnings. While short-term market volatility based on headlines and political rhetoric can be expected, long-term asset values and returns are primarily driven by fundamentals. Although, the potential for a Trump trade war and a burgeoning US fiscal deficit are wildcards for 2025.
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Source: Refinitiv, Wilsons Advisory.
Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.
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