A Look at the 2024 Election

Presidential elections always add a little extra sizzle to market outlooks, raising a host of important questions. What impact will potential policy changes have on the market? What changes actually have a chance of getting through Congress? What will regional winners and losers look like based on foreign policy?

Most strategists downplay the impact, citing market returns at the index level under various presidential regimes of both Republicans and Democrats, with a clear main message: “It doesn’t matter. Markets generally go up. Stay invested.” True, and obvious for any long-term investor, but not helpful to address client concerns in the near term.

Other economists and strategists focus on their own view of what they want to see happen. “Government is too big; the spending needs to stop,” for example. I 100% agree, and this commentary fires me up, but how exactly does this help me allocate capital? Unless the proposed solution has a prayer of playing out, it’s probably better suited for lobbying efforts.

Bottom line, elections shouldn’t be ignored. Markets may go up over time, but policy shifts can create divergences in the short run—and crown winners and losers.

After Iowa and New Hampshire, the 2024 election now looks to be a near certain rematch of 2020. Donald Trump vs. Joe Biden, round 2. So, what might that mean for investors??

What Stays Consistent

First and foremost, one thing both candidates have in common is that neither has expressed any intention of tackling the unsustainable trajectory of the national debt load. In fact, both made the situation significantly worse during their time in office, with President Trump adding $7 trillion to the national debt and President Biden adding $6 trillion in his first three years.

But wasn’t this all pandemic-driven? COVID stimulus played a major part, but even pre-COVID, the Trump administration was running a ~5% deficit as a percentage of GDP. Post-COVID, the Biden administration hasn’t hit a level below 3.7% of GDP.? Needless to say, this is not an issue that’s likely to get any better over the next four years, no matter the outcome of the presidential election. In fact, I anticipate it becoming much worse.

In my view, the implications of this dynamic for investors are pretty clear: upward pressure on interest rates and inflation, a steepening yield curve, downward pressure on the U.S. dollar, and strong support for equities. This is because more bond supply will be coming to market, while debt becomes riskier. Meanwhile, the excess spending should continue to help keep the economy, and specifically the labor market, running strong, which should continue to be a tailwind for earnings and equity market returns.

Should either party, but especially the Democrats, have full control of Congress, these implications could be even more pronounced. Let’s just say I wouldn’t envy Chair Powell’s role with such an outcome. The spending and entitlement tailwind could be tough to contain. As such, all else constant, overweighting equities at the expense of an underweight to bonds and cash seems like a viable strategy heading into November.

Volatility Likely to Rise in the Fall

Investors hate unknowns, and policy uncertainty creates a lot of them. The typical result is heightened equity volatility leading up to November. The charts below show this dynamic in 2016 and 2020. As Election Day approached, volatility increased significantly, only to fall right after the outcome of the election and balance of power in Congress became clear.

I would expect a similar pattern in 2024, but to a much lesser extent for the simple belief that there are far fewer unknowns. We know where both candidates stand on the important issues impacting the market. Should the balance of power start to look one-sided, particularly leaning towards a Democratic sweep, that could be a different story. In this scenario, I would expect the proposed corporate tax hikes, which would take a toll on earnings, to be a focal point – spooking investors and stirring up volatility. Bottom line, expect election-driven volatility heading into the fall.

Winners & Losers

Based on the outcome, various winners and losers are likely to emerge. A Trump victory would likely put pressure on renewables and green energy companies as current subsidies come under fire, while at the same time breathing new life into traditional energy companies given his friendlier stance towards fossil fuels. A push for further deregulation could also prove to be a tailwind for financials, while the implementation of fresh tariffs on China, Mexico, and others could prove costly for developed ex-U.S. and emerging markets, along with U.S.-based companies with heavy exposure.

A re-election of President Biden would look much different. The spigot for green energy would remain on in full force, and policy would continue to be unfavorable for traditional energy companies as well as pharmaceuticals. Foreign policy would remain status quo.

For the Portfolio

Election outcomes matter for capital markets. While it’s still far too early to speculate on a clear winner in the 2024 election, with a Trump/Biden rematch near certain, there are ways investors can prepare. Cautiously increasing equity exposure, while reducing fixed income exposure, and bracing for a shortened period of excess volatility in the fall all appear prudent, regardless of the outcome. Tactical opportunities will likely bubble up to the surface as November gets closer, but at the moment, it’s too early to call. I'll have more to say on this as the November election approaches...stay tuned!

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Tim Urbanowicz is the VP of Research & Strategy at Innovator. This material contains the current research and opinions of Tim Urbanowicz, which are subject to change without notice. This material is not a recommendation to participate in any particular trading strategy and does not constitute an offer or solicitation to purchase any investment product. Unless expressly stated to the contrary, the opinions, interpretations, and findings herein do not necessarily represent the views of Innovator ETFs or any of its affiliates.

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