2024 Presidential Election Newsletter
Coin Flip 2024
The introduction of Vice President Kamala Harris to the top of the Democratic ticket has substantially improved the situation for Democrats relative to Joe Biden’s chances before his July 21 exit from the race. However, with days to go until voting day, the outcome of the 2024 US Presidential election is essentially a coin flip. All seven of the swing states most likely to matter are polling within a 2% margin for either candidate and the most important state of all – Pennsylvania – is polling at a dead heat between the Harris and Trump campaigns.
While the candidates differ on many social issues, neither is championing broad austerity policies or spending reductions in a manner that would hurt economic growth. While the degree of increase to the Federal deficit does vary between the two candidates, the broader theme of expansionary fiscal deficits is likely to continue over the course of the next four years.
For markets, the fate of 2017’s Tax Cuts and Jobs Act reigns supreme. While the corporate tax provisions of the bill have been enshrined in permanency, the changes in taxation for individuals are set to expire at the end of 2025. On the topic of taxation, there is substantial difference between the two candidates and their proposed policies.
The ultimate path of policy, however, is likely to be decided in the Senate. Republicans have a large geographic advantage with far fewer Senate seats up for election than Democrats and in much safer races. Democratic seats in West Virginia and Montana are viewed as either gone or extremely vulnerable, while seats in Ohio, Pennsylvania and Michigan are now classified as toss-ups by the Cook Political Report. We think the Senate flipping to Republican-control is highly likely.
For the Presidency, the outcome is impossible to tell, and the only responsible forecast is that this is truly a 50-50 contest. The two candidates are neck and neck with very few undecided voters amid a very fraught period at home and abroad. Former President Trump is currently polling better in six out of seven swing states compared to 2020. If polls understate Trump support as they did in 2016 and 2020, Donald Trump could easily see a sizeable Electoral College victory. However, no president has been underestimated 3 elections in a row and if Democratic support is underestimated like in 2022 then Harris would likely see victory by a substantial margin.
Policies, Markets, and Economics
While the outcome of the election is far from certain, the impact the victor will have on policy going forward is anything but. While all Presidents can have wide reaching sway on the direction and magnitude of policy, language in pre-existing legislation and quirks around the Federal Budget mean that the next President will have a great deal of impact on longer run policy, particularly when fiscal is concerned.
For markets, the largest singular political issue in the 2024 Presidential election surrounds the coming 2025 expiration of various provisions in the Tax Cuts and Jobs Act (TCJA). Passed in 2017 through reconciliation, the TCJA contained tax cuts – lower rates, a bigger standard deduction, a larger child tax credit, business tax breaks and relief from the alternative minimum tax. But it also contained tax increases, including the elimination of per-person exemptions, limits on itemized deductions and a $10,000 cap on deductions for state and local tax payments.
Due to requirements around reconciliation bills and deficit expansion, many of the provisions in the TCJA are set to expire in 2025. While the reduction of the corporate tax rate from 35% to 21% is not set to expire, many of the individual provisions will sunset. The Congressional Budget Office estimates that the expiration of the individual provisions would raise $4.6 trillion over a decade, while the Tax Policy Center calculates the average taxpayer would see a 1.8% decrease in their After-Tax Income. Lawmakers in both parties say they want to avoid these increases, which amount to hundreds of billions of dollars annually. Republicans want to extend all the expiring tax cuts, while Democrats want to keep the reductions for households making under $400,000 a year and increase the top individual rate to 39.6% for incomes over that threshold. Roughly 90-95% of households fall under the $400,000 income level.
While both candidates want the individual tax cuts to be extended, there are significant differences on their spending plans or preferred taxation of companies and individuals. Vice President Harris wants to increase the corporate tax rate to 28%, while increasing the top tax rate on long-term capital gains to 28% for taxable income above $1 million and net investment income tax (NIIT) to reach 5% on income above $400,000. This money would be spent on a variety of measures including an expansion of the child tax credit and earned income credit, incentives to promote new home construction, and a $25,000 credit for first-time homebuyers over four years.
Former President Donald Trump wants to lower taxes further, almost across the board. Alongside a full extension of the TCJA, he would like to lower the corporate tax rate overall to 20%, and even lower – to 15% – for corporations with production inside of the United States. The Trump campaign has made a myriad of tax proposals, but some of the more concrete policies include an increase in the Child Tax Credit to $5,000, exempting tip income from taxation, and floating a reinstatement of the unlimited State and Local Tax deduction. We believe a reinstatement is unlikely to materialize. The repeal of the unlimited deduction is a significant revenue raise at $1.2 trillion over a decade, and it’s a regressive benefit - 92% of the tax cut would go to households in the top 10% of earners, and less than 1% would go to the bottom 60%. Floating an expiration of the deduction is helpful for Republicans running in Congressional seats in New York, New Jersey, and California but we do not believe there is much appetite in terms of legislation should Republicans win a majority.
To pay for the tax cuts Trump has proposed an expansion of the tariffs placed in his first term, where he quadrupled the tariff on imports of Chinese goods from 3% to 12% on average. Privately, Trump has discussed with advisers the possibility of imposing a flat 60% tariff on all Chinese imports. Additionally, Trump has floated imposing a 10% tariff on nearly all imports, which totaled $3 trillion in 2022. The executive has wide latitude over trade policy and would likely be able to place sweeping tariffs without congressional buy-in, and large scale tariffs could likely be put in place through either a national security framework, used for the steel and aluminum tariffs, or the International Emergency Economic Powers Act which Trump nearly used to place a blanket 5% tariff on all goods imported from Mexico.
The winning candidate and the composition of congress will have large impact on the market outlook for both equities and bonds. According to Goldman Sachs, profits could shift in the ballpark range of 5% to 10%, depending on how the policies are enacted and whether Donald Trump’s 2017 tax cuts are allowed to expire. Trump’s promise to cut the federal corporate tax rate to 15% from 21% would raise S&P 500 earnings by about 4%, the strategists wrote. Harris’ proposal to lift the rate to 28% would reduce earnings by about 5%, they said, while changes to the taxation of foreign income and an increase in the alternative minimum tax rate would cut earnings by about 8%. Corporate tax increases would lower profits and muddy the outlook for corporate stock buybacks, which has been a key source of equity demand in recent years. Given elevated market multiples and that much of the market rally we’ve seen over the last 2 years has surrounded optimism around Artificial Intelligence and a broadening recovery in profit growth, higher corporate tax rates would very likely be detrimental to equity values.
While Donald Trump and Kamala Harris differ significantly on their fiscal initiatives, they share one key similarity: neither candidate has a plan that reduces the deficit or addresses the United States’ exponential growth in the Federal Debt. According to an analysis by the Committee for a Responsible Budget, a full enactment of Harris’s plan would increase the debt by $3.95 trillion over a decade relative to current law. Trump’s plan would increase the debt by $7.75 trillion due the greater magnitude of tax cuts, limited revenue raises, and higher interest costs over the decade. Both candidates are set to increase the country’s Debt-to-GDP ratio by 8%–17% relative to current law.
Over the short term, this is a positive for the outlook on economic growth. Government spending has been a key source of growth for the economy over the last several years, boosting Gross Domestic Product on average by 0.63%. We believe it has also been a source of stability in consumer spending as an aging generation increasingly claims Social Security. 71.7 million people received Social Security or Supplemental Security Income in January 2024 – just 6 million fewer than the number of workers over 16 that were paid at hourly rates in 2022. Bank of America’s June 2023 Consumer Checkpoint release found that while Generation X and younger had meaningfully curtailed spending, older generations were largely keeping overall consumer spending afloat.
Politicians don’t win elections by cutting spending and there has been a stark increase in the number of counties dependent on government aid over the last 20 years. In 2000, 1 in 10 counties drew more than 25% of personal income from federal and state safety-net and social programs. In 2022, more than half of all U.S counties drew at least a quarter of their income from government aid.
The dependency is even more apparent in the swing states that are most likely to decide the election. About 70% of counties in Michigan, Georgia and North Carolina are significantly reliant on the government income. So are nearly 60% of counties in Pennsylvania. In Arizona, 13 of the 15 counties are heavily reliant on safety-net income. Measured another way, a whopping 44% of Michigan residents live in counties that are significantly dependent on government programs. In Arizona, Pennsylvania and North Carolina, more than a third of the population lives in such counties.
States, Issues, Polls, Demographics
The reticence to address the Federal Government’s budgetary issues becomes clearer considering the map for the 2024 Presidential election is functionally the same as it was in 2020. Last election, President Joe Biden flipped the states of Georgia and Arizona while winning back Wisconsin, Michigan, and Pennsylvania – all of which were key flips for Donald Trump’s 2016 victory. The Harris campaign’s electoral hopes largely rely on a repeat performance.
There are 7 states that matter in the race for the presidency: Michigan, North Carolina, Nevada, Wisconsin, Georgia, Arizona, and Pennsylvania. For both campaigns, the “Blue Wall” states of Pennsylvania and Michigan are by far the most important – the 3 states have a combined 44% chance of being the tipping point state in deciding the victor with Pennsylvania widely considered the most important state of all. Just 3% of battleground voters are undecided, and the campaigns are spending substantial amounts of money to change their mind – the 2024 elections will see at least $15.9 billion spent in total according to OpenSecrets. Pennsylvania has already seen more than $954 million flooded into TV, radio, and digital ads across the state – more money than any other state in an election cycle in U.S. history, according to AdImpact.
The 2024 presidential election is razor thin, revolving around a tiny proportion of voters who and a handful of topics that are likely to be key for making that choice. The 2020 election was unique in the sense that the Economy largely wasn’t on the ballot – the share of Americans stating economic issues were the most important stood at just 10% according to Gallup, the lowest level in data going back to 2001. Since the vaccination drive of 2021 and inflation’s 2022 surge, voters have largely reverted to the mean with the economy now being the top issue for 45% of voters surveyed by Gallup.
However, the 2022 Midterm elections largely saw the same spike in importance for economic issues and Republicans were widely expected to sweep Congressional and Senate elections in a year where headline inflation hit a peak of 9.1%. The polls ended up being wildly wrong. Republicans narrowly won a majority in the House of Representatives and lost one seat in the Senate as the June 2022 Supreme Court decision to overturn Roe vs Wade mobilized voters to the polls. Today’s election has a similar dynamic – the Economy is the most important issue, but it is far from the only issue on voter’s minds. For Republicans, the Economy is the top issue followed by Immigration. For Democratic voters, Abortion is the top issue with a particular focus on Health Care and Supreme Court appointments.
These are also the three categories where there is the most daylight between Donald Trump and Kamala Harris in the eyes of voters. Abortion is far and away Donald Trump’s worst issue, trailing Harris by 19 points in a Cook Political Report survey of swing state voters. However that same survey shows he outperforms Harris by 5 points on the elections top issue, the Economy, and leads by 9 points on Immigration – which has emerged as a particular flashpoint in political discourse given the surge in illegal immigration seen in recent years.
Despite being subject to much debate, increased immigration has overall been a net benefit to the economy and a boon for growth. In a July report, the Congressional Budget Office (CBO) reduced its outlook for deficits by $990 billion and marked up its expectations for the size of the US economy by almost $9 trillion over the next decade which it largely attributed to an 8.7 million increase to its estimates for net immigration over the 2021–2026 period. The sentiment among Americans around immigration, however, has seen a sharp decline in favorability since the last presidential election.
In 2020, 28% of Americans told Gallup that immigration should decrease. Just 4 years later, that number had nearly doubled to 55% – the highest level since October 2001 immediately following the September 11 attacks. Republican attitudes have shifted the most, but Democrats and Independents have also notably soured on immigration. For the first time in nearly two decades, a majority of Americans want immigration levels to the U.S. reduced rather than kept at their present level or increased.
This suggests that the outcome of the election will likely hinge around whether undecided swing state voters perceive Abortion or Immigration as the more important issue. About one in four voters say they will vote only for candidates who share their position on immigration, but about one in three will only vote for a candidate that shares their view on abortion. The power of this issue on voters has been seen numerous times be it the significant outperformance by Democrats in the 2022 Midterms, or numerous pro-choice measures being enshrined in heavily red leaning states – including a 17% margin rejection for a ballot measure limiting access to abortion in Kansas in 2022, just 2 years after Trump won the state by 15%. Whether the 2024 election sees the same level of importance for the issue with voters is an open question, and one that will likely have significant impact on the ultimate outcome.
Congress & Senate
Relative to a Presidential race that remains too close to call, there is much more certainty in the race for the House of Representatives and the Senate. While the Presidential election certainly matters, the outlook for policy largely runs through the Senate as Presidents cannot unilaterally pass legislation – legislation must be passed in both the House and Senate. For the 2024 election, the Senate election largely matters as the outcome has significant impact on potential tax policy seen under either candidate.
Democrats have a much more difficult path to a majority in the Senate than Republicans do. Currently holding a 51-seat majority, the Democrats have 23 seats up for election while the Republicans have just 11 seats in contention. Just 15 Democratic seats are considered Solid or Lean Democratic, with 8 seats in more questionable elections. The retirement of West Virginia Senator Joe Manchin in one of the most pro-Trump states in the country is likely an easy pickup for Republicans, while Jon Tester’s seat in Montana looks highly vulnerable. Conversely, Republicans have no Senate seats up for election in a state that has a net positive view of Vice President Harris.
With the realities of seats in Montana and West Virginia, Democrats likely need an outperformance in Florida and Texas to maintain their current majority. Given polling shows Trump up by 8% in Texas and by 7% in Florida, we view this a highly unlikely. The Cook Political Report moving the Pennsylvania Senate race from “Leans Blue” to “Toss-Up” makes Democrat’s hopes of a Senate majority slimmer still and largely reliant on an outperformance by Nebraska Independent Dan Osborn – a union leader who helped organize a 1,400-worker strike across multiple cereal plants in 2021 – who has had a remarkable surge in the race against Republican Deb Fischer. Over the last 2 months, the Cook Political Report has dramatically changed to outlook from “Solid Republican” to “Leans Republican” as Osborn has tapped into a well of discontent with Congress and leaned on his status as a political newcomer and his background as a union laborer to appeal to working-class voters from across the political spectrum. Osborn has said that if elected, he won’t caucus with either major party, unlike long-serving independent Senators Bernie Sanders and Angus King, who normally vote with Democrats and are counted among their ranks for purposes of allocating power. Depending on the overall margin of control, it could give Osborn a pivotal vote, like the roles Senators Joe Manchin and Kyrsten Sinema played in alternately advancing and blocking parts of President Joe Biden’s agenda.
Conclusion
With the conclusion of the 2024 Presidential election, so too concludes the last major election in a year that sees more than 70 countries hold elections involving more than half of global adults. So far, 2024 has largely been about change elections that have seen incumbent governments cede power globally. Emmanuel Macron’s government suffered a crushing loss over the summer to the French far right, while Germany has also seen a rightward shift. In Japan, voters recently deprived the ruling Liberal Democratic Party of the absolute majority it has held for over a decade in Japan’s lower house. Canada’s Justin Trudeau looks vulnerable in next year’s election and recently slashed immigration targets by over 20%.
To be sure, while the global political shift has tended to be to the right, it hasn’t been a unanimous move. In the UK, Rishi Sunak’s Conservatives suffered the worst general election defeat in its parliamentary history to the left leaning Labour Party. Inflation has simply been devastating for incumbent governments of all types in 2024.
Voters despise inflation and there is a distinct difference in perception of the recent inflationary surge between Main Street, the halls of Washington D.C, and Wall Street. Much to the delight of economists, the rate of inflation has fallen substantially from its highs in 2022 and has returned to a level more in line with the target set by the Federal Reserve. Voters, however, view their day-to-day life by price levels rather than inflation rates – and consumer prices are currently more than 20% above levels seen when Joe Biden took office in 2021.
While most economic data shows strength, adjusting these numbers for inflation underlines the dramatic impact it has had on American finances and attitudes. Median Household incomes after adjusting for inflation – or put in “Real” terms – are still below their 2019 levels, having declined in 2020, 2021, and 2022. Household Wealth has shown strong growth in nominal terms – up 25% in the first 42 months of Biden’s term – but is up a paltry 3.3% over three and a half years after accounting for inflation.
Donald Trump and Kamala Harris are campaigning for President at the end of a very turbulent 4-year period for the American populace. By and large, voters consider themselves worse off. In November 2023, 3 in 5 workers told Bankrate their incomes hadn’t kept pace with inflation. In a recent CNN poll, just 16% of respondents said their financial position had improved in the last 12 months. Today, the University of Michigan’s measure of a consumer’s perceived financial situation relative to 5 years prior sits at its lowest level in over a decade.
To be sure, we are optimistic around the outlook for the economy – we think the totality of the data is supportive of a continued expansion on fundamentals, regardless of the political outcome. That said, economic statistics are based on broad averages and how a given family or individual has fared over the past five years depends on a litany of factors: whether the earners own their home or rent; whether they had to buy a car or send a child to day care; whether they were able to change jobs or demand a raise.
The Consumer Price Index is based around the average share of a spending basket across the economy – the average family spends roughly 8% of its budget on groceries, so groceries represent about 8% of the index. Families with children, though, often spend much more than 8% of their budget on food, just as workers with long commutes spend more than average on gas and residents of cold climates spend more to heat their homes. So, while overall data for the economy looks strong, variations in a family’s situation to the average could result in wide disparity from the financial outcome you would expect versus the sentiment they feel.
For example, a homeowner who locked in a 3% or lower mortgage early in the pandemic and saw substantial appreciation in the price of their home likely has a very different view of their current situation compared to a renter wondering whether they’ve been locked out of homeownership permanently as their monthly rent has risen 25%. 89% of respondents told the Wall Street Journal that owning a home is either essential or important to their vision of the American Dream, and their perceived likelihood of achieving that dream will directly impact their sentiment at the voting booth. Today, just 10% of Americans believe that homeownership is easy or somewhat easy to achieve, while two in three believe the American dream either never held true or no longer does.
No President has been re-elected with Joe Biden’s current 40% approval rating. For Vice President Harris, her election hopes rely on her ability to both convince voters that she is the candidate that represents change and separate herself from the unpopular Biden administration she served in. In a September New York Times/Siena College poll, more than 60% of likely voters said the next president should represent a major change from Mr. Biden, but only 25% said the vice president represented that change, while 53% said Donald Trump did. In a hopeful sign for Harris, the October release of the same poll found voters said Ms. Harris was the candidate representing change in this election, 46% to 44%. The finding was a first for Ms. Harris, albeit with a differently worded question than in previous polls.
With margins this tight, kitchen table and pocketbook politics matter. The University of Michigan’s party affiliation breakout for consumer confidence shows that Democrats are more inclined to believe economic conditions are fine, with a 50% higher assessment of the economy than is seen with Independents. As a result, one of the largest risks we see for the Harris campaign at this stage in the election is that their closing messaging for the election is off. The Center for Working-Class Politics recently tested a variety of political messages on voters in Pennsylvania, to determine what kind of rhetoric is working to nudge blue-collar voters toward Harris. In another sign that the economy is the top issue on the ballot, no message was as unpopular for swinging voters to Harris as the “democratic threat” message. Among blue-collar voters, a group that leans Republican, the democratic threat message was a whopping 14.4 points underwater relative to the average support for Trump’s messages.
If current polling is to be believed, the 2024 election is set to be one of the closest in modern history. Margins are razor thin and an incredibly small portion of the electorate remains undecided. The permutations for the election are vast, ranging from landslides for either candidate to being decided by just a few thousand votes. Amazingly, there is a genuine chance that Donald Trump wins the popular vote and loses the electoral college, as Ms. Harris is holding up relatively well among white voters, who represent an outsize share of the vote in the key Northern battleground states. This would be the first time in 20 years that a Republican won the popular vote, and the first time in modern electoral history that a Republican both won the popular vote and lost the election.
We see the fundamentals of the economy as relatively strong and stable with 2025 shaping up to be a record year for earnings. That bodes well for the equity market regardless of who wins the White House. For markets, a Harris victory is likely worse for stocks, particularly if the Senate and House go Democratic in an outperformance to current polling as tax increases and changes to the filibuster are very much on the table. We view this as the lowest probability outcome of the election. A Trump presidency is more favorable for stocks but would likely be substantially more negative for bonds as his policies would provide a boost to growth, markedly increase the deficit, and likely lift inflation. However, at the end of the day economies grow, consumers spend, and businesses innovate regardless of the President in office. Certain policies can slow or accelerate these trends, but very rarely do they derail them.
The U.S economy and the U.S consumer are the envy of the world. With inflation’s decline, and the stabilization seen in the labor market the Federal Reserve is on the verge of achieving the much talked about “soft landing” that seemed so unrealistic just 2 years ago. While the two candidates are certainly different, neither is likely to meaningfully cut fiscal spending, and both are supportive of growth. The average consumer doesn’t alter consumption based on the party in office, and continued consumption is a key ingredient in an expansionary economy and market.
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