When President Joe Biden announced that he was stepping down from the 2024 US presidential race, all investors’ and analysts’ election predictions went out the window.
The widespread support provided to Vice President Kamala Harris marked a clear change in attitude from Democratic voters, who saw increased hopes of a November win. In the 24 hours following the announcement of her intentions to run, Harris’ campaign team raised more than $81 million. And, just like that, the race had begun again. But will this enthusiasm be enough to grant her a win? What do the markets think?
The US election is known to have direct economic implications across the globe. Although polls remain tight, history can provide some lessons regarding market behaviour in the months that precede the November vote. Union Bancaire Privée’s (UBP) Group Chief Strategist, Norman Villamin, and its Global Head of Forex Strategy, Peter Kinsella have analysed the US economic and political predictions to provide investment advice for investors worldwide.
Kamala Harris’ odds of winning the White House have started at between 40% to 45%
So far, the Swiss private bank’s predictions have rung true. As expected, the perceived likelihood of a Trump victory, as well as the overall economic landscape created an attractive opportunity for equities and credit investors over the summer months, yielding high returns. Going forward, UBP expects greater volatility, advising investors to turn their focus to managing risk and pivoting to safer investments such as stock and currency selections.
Harris’ odds
The US is on the brink of electing its first female POC President. It all resulted from Joe Biden’s decision to suspend his campaign for a second term in office, following an ill-fated debate performance. Yet, Joe Biden’s exit was not a given.
Looking at voting intention surveys, UBP pointed out that, at the time of the suspension of his campaign, Biden’s polling averages were rebounding from the lows reached shortly after the debate. In fact, although Harris’ entry into the race has brought forth significant amounts of enthusiasm, her odds of winning the White House have started at between 40% to 45%, not far from the President’s own, prior to the June 2024 debate. The result is a very tight race, with no obvious leader as of yet.
“Our work suggests that the presumed nomination of current US Vice President Kamala Harris has staunched the outflow of Democratic party support following June’s poor debate performance,” the authors stressed. “However, relative to the pre-debate standing of current President Joe Biden, initial polling suggests that former President Donald Trump has increased his lead nationally since mid-June versus Vice President Harris.”
Looking at the Republican candidate, former President Trump’s odds were “on something of a rollercoaster ride in July”. Trump received a surge in support as a result of the June debate, as well as the assassination attempt. Yet, the Republican Party standard bearer has seen no traditional “convention bump” in his odds of winning following the conclusion of the Republican National Convention in July. Instead, betting markets put the likelihood of a Trump win in November at 57%.
As such, national polls continue to suggest a tight race, with only a 1.7% difference in the odds of one candidate winning versus another, according to RealClear Polling. In a time when a President can be chosen by a mere 44,000 vote difference in certain states—as was the case of the 2020 election—the jury’s still out on what might happen in November. In the face of policy uncertainty, the markets are set to experience volatility.
Where do Trump and Harris stand on tax?
Where do both candidates stand on taxes? The Harris campaign is yet to make a specific pledge, but it is generally expected to follow on the promises made by President Joe Biden’s March State of the Union address, in which he put forward a proposal to taxes on corporations and high-net-worth individuals, as well as outlined the expiration of Trump’s 2017 tax cuts, which lowered the corporate tax rate from 35% to 21%, cut individual income taxes and increased the standard deduction.
“In the next hundred days, the Harris campaign will need to carve out a handful of policies to not only distinguish her campaign from the Republican platform but also to enhance and improve the Biden platform and messaging from March,” Villamin and Kinsella noted.
$3.8 trillion in additional funds would be needed to maintain the 2017 Trump tax cover over the next decade
The authors expect the expected Democratic nominee to fight criticism regarding the impact of high inflation on middle-class families by emphasising the reallocation of tax burdens. Thus, the focus of Harris’ programmes is likely to be on middle-class tax credits, affordable housing programmes and student loan relief as outlets for the proceeds from increased taxes. “A strategy to secure key industrial Midwest battleground states will probably see a more distinct policy divide both socially and geopolitically,” they added.
Looking at Trump, it’s important to note his change in direction regarding fiscal policies. The choice to share the presidential ticket with Senator J. D. Vance is the first sign of this shift, according to UBP. Senator Vance is known to have opposed the measure to raise the US debt ceiling, preventing a default, and he has spoken about the need for a fundamental reform of the US budgeting process. Moreover, other members of the Trump-Vance campaign have propose a freezing in non-defence spending as an offset to the tax cuts.
The former president has stressed its intention to make the 2017 tax cuts permanent. Despite its short-term economic benefits, this would mean footing a bill of an additional $3.8 trillion over the next decade, increasing the federal debt to 211% of GDP by 2054, compared to the 100% of GDP at which it currently stands.
“US fiscal challenges are getting overlooked in the 2024 US presidential campaigns and will constrain the eventual winner of the coming election,” Villamin and Kinsella stressed. “We are seeing the beginnings of this realisation being priced into the markets.”
Where to invest during the race
The run-up to a US presidential election is, historically, not a good time to invest. Since the end of World War II, five of the 16 presidential election years have seen negative returns in the period between July and October preceding a November national vote. Thus, UBP notes that “seasonality likely warrants investors take a more cautious stance”, as the tailwinds of the first half of the year begin to ease.
“When valuations are in excess of 20x earnings, as they are today, average investor returns in the following 12 months fall to only 0.3%”
UBP report
For the past few months, financial analysts predicted an attractive summer for risk-reward opportunities in equities and credit. The market has followed through, delivering the strongest presidential election year performance through July since World War II. However, as the season comes to an end, experts have advised a transition that will prepare portfolios for “the more uncertain and riskier backdrop that may emerge in 2025”. Even with the prospect of a likely Fed rate cut come September, UBP still advises caution, particularly given the market performance year-to-date.
“While historically Fed rate cuts have translated into average returns of 11% for US equity investors over the following 12 months, when valuations are in excess of 20x earnings, as they are today, average investor returns in the following 12 months fall to only 0.3%, with two years (1987 and 2001) seeing -15% returns over the following year,” Villamin and Kinsella explained.
Gold’s appeal heightens during elections
In times of uncertainty, gold is almost always a safe bet. Having capitalised on the strong returns in equity and credit in the run-up to the election through early July, investors are now advised to turn to gold and inflation-linked bonds to secure protection against the volatility expected during the political transition.
“We anticipate that fiscal uncertainty with a new presidential administration would bring about both economic and geopolitical costs which would favour gold,” the UBP experts noted. “Indeed, having outpaced both bonds and non-US equities over every time horizon over the past 30 years, we believe gold presents an attractive anchor for real, inflation-adjusted wealth preservation in the years ahead.”
The future is never as uncertain as in the months preceding an election, and never so in one as tight as this year’s. The succession of surprises over the summer months—from the assassination attempt on Trump to Biden’s campaign exit—has kept investors on their toes. Yet, the past few months have also yielded extremely positive market results. Moving forward, the only assurance is uncertainty, but wise investments can still yield positive results.
