How will the U.S. elections impact the market?

September is typically a sluggish month for the stock market; however, this year, the significant 0.5 percentage point rate reduction by the Federal Reserve (FED) was interpreted as an indication that the U.S. economy may be approaching a "soft landing" scenario.

Major indices, including the S&P 500 and the Dow Jones Industrial Average, reached new all-time highs as investors welcomed the return of the spread between 10-year and 2-year Treasury yields to positive territory. This is a typical occurrence, as yields on longer-term securities are generally higher than those on shorter-term ones, except in times of recessionary concerns.

The U.S. presidential election is amongst the most closely monitored political events globally, given America's position as a global superpower. Currently, predicting the winner of the 2024 election is challenging, as polls and betting markets indicate a very close race.

Regardless of the outcome, these elections are expected to affect global financial markets both in the lead-up to and following the event.

If you are a trader or an investor you should anticipate volatility, as markets tend to react negatively to uncertainty, particularly when polls are close and the winner is hard to ascertain. However, there is also the possibility for substantial gains, as historical data suggests that the stock market can bring strong returns for investors over the long term, irrespective of which political party is in power.

These circumstances underscore the importance of making investment decisions with a long-term perspective, rather than being overly influenced by short-term fluctuations.

Each candidate presents a completely different vision for the future, and the election's outcome is likely to have varying implications for different sectors and areas of the economy.

Below, I outline the key aspects of each party's agenda and examine the types of stocks that may be affected.

DEMOCRATS PROPOSALS

• National prohibition on "price gouging"

This refers to the practice of elevating the prices of goods beyond what is deemed reasonable or fair. This regulation will affect major grocery retailers, as it may lead to a decrease in their profit margins.

• Tax incentives for homebuilders and the creation of 3 million new housing units within 4 years

These initiatives are designed to support home construction companies.

• Improvement of American household disposable income

Through initiatives such as the expansion of the Child Tax Credit, the Earned Income Tax Credit, and an increase in the minimum wage, these proposals could result in a considerable rise in consumer spending nationwide, significantly impacting the consumer discretionary sector, which encompasses non-essential goods and services, including hotels, restaurants, automobiles, specialty retail, and leisure products.

• Prioritization of healthcare

Democrats are advocating for a cap on insulin prices at $35 and limiting out-of-pocket prescription drug expenses to $2,000 annually. While these actions may adversely affect certain pharmaceutical companies, particularly those focused on diabetes, they could benefit firms that develop affordable medications. Additionally, Harris has committed to enhancing subsidies under the Affordable Care Act (ACA) and eliminating medical debt, which may negatively impact health insurance providers.

• Continuation of the transition to renewable energy

This effort, initiated by the Biden administration, could bolster companies that specialize in solar, wind, and other sustainable energy solutions.

• Increase in the US corporate tax rate from 21% to 28%

This tax hike could enhance government revenue but may also burden overall corporate profitability, resulting in diminished earnings for large corporations, particularly those with significant profits generated in the United States. This initiative carries potential risks for short-term gains in the S&P 500.

REPUBLICANS PROPOSALS

• Significant Expansion in Oil and Gas Production

This initiative seeks to enhance drilling operations, thereby increasing production levels, which could potentially boost profits for companies within the sector. While this strategy favors the oil and gas industry, it is crucial to acknowledge that the energy sector is influenced by various factors, including oil prices as driven by supply levels (namely those that are dictated by OPEC+ and/or affected by geopolitical tensions), as well as operational challenges that persist regardless of the current administration.

• Withdrawal from the Paris Agreement on Climate Change

Donald Trump has characterized climate change as a “hoax,” suggesting that a Republican victory could hinder the nation’s progress towards clean energy, significantly affecting the renewable energy sector.

• Revitalization of America’s Traditional Automotive Industry

Trump aims to rejuvenate America’s traditional automotive sector, which has faced difficulties in recent years, while also seeking to dismantle President Joe Biden’s electric vehicle (EV) initiatives. Consequently, a Republican win could pose a substantial obstacle to the long-term advancement of EVs.

• Reinforcement of the Defense Industry

During his previous presidency, Trump increased military funding and prioritized the modernization of the U.S. armed forces. Should he be re-elected, he is likely to continue this approach, which could bolster the revenues and stock values of aerospace and defense companies.

• Implementation of Tariffs

To stimulate U.S. manufacturing, Republicans propose imposing blanket tariffs ranging from 10% to 20% on nearly all imports, alongside tariffs of 60% to 100% on goods imported from China. Such tariff policy could lead to a surge in cargo rates, resulting in increased ocean container shipping market rates, with the elevated costs ultimately being transferred to shipping companies and, subsequently, to consumers.

• Banking desregulation

Trump intends to diminish the authority of U.S. financial regulators and alleviate Wall Street from what he describes as "burdensome regulations." Consequently, a Republican victory could be advantageous for large banking institutions.

• The end of trade with Taiwan

Trump recently expressed the possibility of altering America's stance towards Taiwan, asserting that the island has appropriated the U.S. chip manufacturing sector. Should a conflict arise between Taiwan and China, it could lead to significant disruptions in global chip supply chains.

• Reduction of corporate income taxes

Such relief may result in increased profits for corporations, which would subsequently lead to higher dividends and share buybacks for investors, thereby enhancing liquidity in the stock market.

Other considerations related to U.S. Elections for other financial assets

• Gold is expected to perform well regardless of which political party occupies the White House. A Republican victory could lead to an increase in gold prices, as Trump's policies and rhetoric may heighten geopolitical tensions, prompting investors to seek safe-haven assets. Conversely, if Democrats prevail, gold prices may also rise due to policies that could result in lower inflation and interest rates in the U.S., which would similarly benefit the precious metal.
• Oil is also anticipated to perform favorably, independent of the ruling party. However, Republican policies tend to favor fossil fuel industries, while Democratic policies emphasize renewable energy, which may lead to lesser gains for crude oil.
• Cryptocurrency may experience better performance under a Republican administration, as Trump has committed to establishing a strategic national Bitcoin stockpile and facilitating operations for crypto mining companies in the U.S.
• Bond markets/ U.S. Treasuries have generally exhibited stability under both political parties. However, recent developments suggest that bond performance is more closely tied to interest rate expectations than to the outcomes of elections.
• The U.S. Dollar (USD) has experienced remarkable strength, primarily due to the Federal Reserve being the first central bank to adopt a stringent monetary policy supported by significant interest rate hikes. Former President Trump advocates for a weaker USD to enhance export competitiveness; however, should the Republicans secure victory, the dollar may strengthen as many party proposals could lead to substantial fiscal expansion and increased economic growth. In contrast, a Democratic win could result in a depreciation of the USD, as their policies tend to favor a more restrained fiscal expansion, potentially resulting in slower economic growth. The Republican stance promotes a more favorable trade policy, which also reduces the necessity for safe-haven currencies.

It is important to note that the escalating U.S. debt will pose challenges regardless of the election outcome, and this factor is likely to exert downward pressure on the dollar in the long term.