GOP clean sweep? What it might mean for markets

Following the conclusion of the Republican National Convention, the contours of the 2024 presidential and Congressional elections are coming into clearer focus. To be sure, considerable uncertainty exists about the Democratic presidential nominee, which depending on how matters evolve, could still significantly change the 2024 electoral calculus.

Nevertheless, given the dramatic events of the past few weeks—a poor first debate for President Biden, a failed assassination attempt against candidate (and former president) Trump, and a unifying Republican convention—public opinion polls and political futures markets are suggesting that a Republican “clean sweep” is possible. A clean sweep will occur if the “Grand Old Party” (GOP) wrests back control of the presidency and a US Senate majority, while maintaining its majority in the House of Representatives.

We feel it is worth sharing our views on the investment implications of a GOP clean sweep. That discussion is warranted not just because of what may ensue following the November 5 election, but because market moves in the coming weeks and months could be significantly influenced by expectations for Republican control of Washington in January 2025.

Clean Sweep: Policy Implications

There was a time when a national party convention unveiled a detailed platform, outlining policy priorities. That is far less true these days, and especially for the Republican Party of 2024.

Nevertheless, based on public statements by candidate Trump, vice presidential nominee JD Vance, and the writings of advisors and think tanks close to the campaign, it is possible to draw broad conclusions about the likely direction of economic, regulatory, financial and international policies that would ensue if Republicans regain control of the executive and legislative branches of government in Washington as of January 2025.

The cornerstones of GOP domestic economic policy will include a complete extension of the 2017 tax cuts (some of which are due to expire at the end of 2025), reductions in various forms of government regulation of business (with strong support from the US Supreme Court decision earlier this year that sharply curbed the regulatory powers of administrative agencies), and a partial reversal of federal government support for alternative energy.

While difficult to quantify at this juncture with precision, those policies (particularly light-touch regulation) are apt to raise earnings expectations for a variety of companies across various sectors and industries. Accordingly, expectations of a clean sweep are likely to be accompanied by further gains in US equities (on top of those already made this year), as well as support for (already tight) credit spreads.

What is less clear is how Republican control of Washington will impact federal government deficits and debt levels, and US Treasury yields. Nothing in the platform or public pronouncements indicates clear plans to reduce government spending, much less to increase taxes. Nevertheless, it does not necessarily follow that lax fiscal policy will necessarily lead to higher bond yields. To the extent that inflation continues to decline, and US growth slows (due to the lagged impacts of Fed tightening), bond yields could fall even if little is done to address large US federal government deficits.

Two other policy areas are worth considering as part of a Republican clean sweep: Immigration and tariffs.

On immigration, Trump and the GOP are vociferous advocates of slowing or even reversing net immigration into the United States. To the extent that objective is realized after 2025, its economic impact is likely to slow trend growth in the US by creating labor shortages. That impact, however, is likely to be a long-term corrosive on US potential growth, yet without significant near-term impacts on capital markets (due to its slow-moving nature).

Trump and his party are also staunch proponents of imposing new or higher tariffs on imports, potentially across products from many countries and regions. High tariffs are unlikely to have any positive impacts on US investment or employment and should instead be seen as unambiguously detrimental to long-term US economic activity. Higher tariffs could also boost prices and hence measured inflation, even if their adverse impacts on business and consumer demand (due to falling purchasing power) are ultimately deflationary.

In sum, a clean sweep is likely to usher in much for investors to like, above all the profit-enhancing benefits of lower taxes and less burdensome regulation. However, to the extent that the GOP policy reverses immigration and raises tariffs, some of those gains could be significantly impaired over time.

Clean Sweep: Investment Implications

What, then, are the key investment implications of a clean sweep?

First, to the extent that markets begin to discount a clean sweep soon, markets will move well before election day. Investors who share conviction about a clean sweep will therefore want to adjust portfolios now, rather than waiting for the election results.

Second, equity and credit markets are likely to broadly welcome a clean sweep, insofar as the likely GOP policies are apt to be profit- friendly, at least initially.

Third, it would be wrong to conclude that a GOP that shows little interest in deficit reduction will negatively impact the US Treasury market. US Treasury yields are more likely to respond to growth and inflation outcomes (and Federal Reserve policy responses), than to the medium-term prospects for deficits and debt.

Fourth, sectors where regulatory burdens will be eased are most likely to benefit from a clean sweep. Broadly, those sectors include health care, finance, oil and gas exploration, as well as those industries facing significant labor or environmental oversight (e.g., basic materials, agribusiness or industrials).

Fifth, some sectors that have benefitted from the Biden administration’s push into alternative energy (via the misnamed Inflation Reduction Act) are likely to be net losers from a clean sweep. Among them are solar and wind producers of alternative energy and electric vehicles.

Sixth, to the extent that a clean sweep implies sharp reductions in immigration and significant new (or higher) tariffs, the long-term outcome will be slower US trend growth. Among others, that outcome would result in lower real interest rates and, eventually, to diminished corporate profitability (as access to lower cost global labor supply and imports is curtailed).

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Equity securities are subject to price fluctuation and possible loss of principal.

IMPORTANT LEGAL INFORMATION

This material is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice. This material may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested.?Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.

Any research and analysis contained in this material has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Data from third party sources may have been used in the preparation of this material and Franklin Templeton (“FT”) has not independently verified, validated or audited such data. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. The mention of any individual securities should neither constitute nor be construed as a recommendation to purchase, hold or sell any securities, and the information provided regarding such individual securities (if any) is not a sufficient basis upon which to make an investment decision. FT accepts no liability whatsoever for any loss arising from use of this information and reliance upon the comments, opinions and analyses in the material is at the sole discretion of the user.

?

Products, services and information may not be available in all jurisdictions and are offered outside the U.S. by other FT affiliates and/or their distributors as local laws and regulation permits. Please consult your own financial professional or Franklin Templeton institutional contact for further information on availability of products and services in your jurisdiction.

Brazil:?Issued by Franklin Templeton Investimentos (Brasil) Ltda., authorized to render investment management services by CVM per Declaratory Act n. 6.534, issued on October 1, 2001. Canada: Issued by Franklin Templeton Investments Corp., 200 King Street West, Suite 1500 Toronto, ON, M5H3T4, Fax: (416) 364-1163, (800) 387-0830, www.franklintempleton.ca .?Offshore Americas:?In the U.S., this publication is made available by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906. Tel: (800) 239-3894 (USA Toll-Free), (877) 389-0076 (Canada Toll-Free), and Fax: (727) 299-8736. U.S.?by Franklin Templeton, One Franklin Parkway, San Mateo, California 94403-1906, (800) DIAL BEN/342-5236, franklintempleton.com . Investments are not FDIC insured; may lose value; and are not bank guaranteed.

Issued in Europe by:?Franklin Templeton International Services S.à r.l. – Supervised by the Commission de Surveillance du Secteur Financier – 8A, rue Albert Borschette, L-1246 Luxembourg. Tel: +352-46 66 67-1 Fax: +352-46 66 76.?Poland:?Issued by Templeton Asset Management (Poland) TFI S.A.; Rondo ONZ 1; 00-124 Warsaw.?South Africa:?Issued by Franklin Templeton Investments SA (PTY) Ltd, which is an authorized Financial Services Provider. Tel: +27 (21) 831 7400 Fax: +27 (21) 831 7422.?Switzerland:?Issued by Franklin Templeton Switzerland Ltd, Stockerstrasse 38, CH-8002 Zurich.?United Arab Emirates:?Issued by Franklin Templeton Investments (ME) Limited, authorized and regulated by the Dubai Financial Services Authority. Dubai office: Franklin Templeton, The Gate, East Wing, Level 2, Dubai International Financial Centre, P.O. Box 506613, Dubai, U.A.E. Tel: +9714-4284100 Fax: +9714-4284140. UK: Issued by Franklin Templeton Investment Management Limited (FTIML), registered office: Cannon Place, 78 Cannon Street, London EC4N 6HL. Tel: +44 (0)20 7073 8500. Authorized and regulated in the United Kingdom by the Financial Conduct Authority.

Australia:?Issued by Franklin Templeton Australia Limited (ABN 76 004 835 849) (Australian Financial Services License Holder No. 240827), Level 47, 120 Collins Street, Melbourne, Victoria 3000.?Hong Kong:?Issued by Franklin Templeton Investments (Asia) Limited, 62/F, Two IFC, 8 Finance Street, Central, Hong Kong.?Japan:?Issued by Franklin Templeton Investments Japan Limited.?Korea:?Issued by Franklin Templeton Investment Trust Management Co., Ltd., 3rd fl., CCMM Building, 12 Youido-Dong, Youngdungpo-Gu, Seoul, Korea 150-968. Malaysia: Issued by Franklin Templeton Asset Management (Malaysia) Sdn. Bhd. & Franklin Templeton GSC Asset Management Sdn. Bhd. This document has not been reviewed by Securities Commission Malaysia.?Singapore:?Issued by Templeton Asset Management Ltd. Registration No. (UEN) 199205211E and Legg Mason Asset Management Singapore Pte. Limited, Registration Number (UEN) 200007942R. Legg Mason Asset Management Singapore Pte. Limited is an indirect wholly owned subsidiary of Franklin Resources, Inc. 7 Temasek Boulevard, #38-03 Suntec Tower One, 038987, Singapore.

?

Please visit www.franklinresources.com to be directed to your local Franklin Templeton website.

?

?