Andrew Dittberner, Chief Investment Officer at Old Mutual Wealth Private Clients
With less than a week until Americans head to the polls, the outcome of the presidential race remains highly uncertain. Adding to this uncertainty, this election cycle has featured several unusual developments.
Firstly, the Democratic nomination was incredibly brief. Within about 20 minutes of President Joe Biden’s announcement that he would not run for re-election, Vice President Kamala Harris was endorsed as the Democratic candidate. This meant that her campaign effectively ran for about three and a half months, far shorter than the typical 18-month campaign.
Secondly, the US appears to be evenly divided between Democrats and Republicans. While the 2016 and 2020 elections were close, the 2024 race is shaping up to be even closer – both nationally and in key battleground states. Just seven states are expected to determine the outcome, with polls in each showing an unprecedented close race.
Finally, there is a unique structural challenge: Vice President Harris, a partial incumbent at the moment, must make her case for change while also representing continuity. This has historically proven challenging for vice presidents running after serving with their president. Only once in the past 188 years has a vice president, George Bush in 1988, been elected for president. It appears that voters look for change, which can make the vice presidency a challenging launch pad for presidential ambitions.
Impact on markets
Recent market moves suggest that investors are confident of a Trump presidency, however, this is not fully supported by opinion polls, which are well within historical margins of error. Additionally, the structure of the government is crucial as it influences the president’s ability to enact policy. If there is a divided government, where different parties control the White House and Congress (made up of the Senate and the House of Representatives), policy outcomes will vary significantly. Therefore, the election’s impact extends beyond who wins; it also depends on how the government is structured, adding further complexity.
The two extreme scenarios are outlined below:
- Republican sweep: Trump would have the freedom to implement inflationary, pro-growth policies that include tax cuts, increased deficit spending and deregulation. Given the recent rises in US equities, bond yields and the dollar, markets may be pricing in this scenario, suggesting that a Republican win could see a more muted market reaction.
- Democrat sweep: A Democratic-controlled government would likely pursue higher corporate taxes and increased regulation, which will not be welcomed by equity and currency markets. However, this could be offset somewhat by increased deficit spending and more open immigration policies, while higher taxes could benefit bond markets. This scenario might reverse some of the recent market gains.
Adding to the uncertainty, investors should not expect an immediate election result after voting day. In 2020, it took about four days to call the race for Joe Biden, and a similar, if not longer, delay is likely this time. Even once declared, the 2020 results remained contested until inauguration, including the 6 January 2021 fiasco.
A prompt, definitive outcome is unlikely for two main reasons:
- Logistical delays: The surge in pre-election voting by mail has outpaced the vote-counting infrastructure. For example, Pennsylvania and Wisconsin cannot start counting mail-in votes until 7am on election day, causing delays.
- Legal challenges: Numerous lawsuits challenging voting practices have already been filed, indicating that the election results are likely to face extensive litigation.
Positioning for stability beyond elections
The policy contrast between the two candidates is stark. And while investors may be tempted to position their portfolios based on election expectations, the race is too close to call. Furthermore, sectors and industries are influenced by a host of other factors, including earnings outlooks, valuations, and economic prospects. These factors are likely to outweigh politics in the long run.
In the short term, sentiment impacts markets, and we have seen some sentiment-driven shifts as election day approaches. Volumes may also dry-up as investors adopt a wait-and-see approach, which could amplify the impact of larger trades on markets. However, for long-term investors, policy is impossible to predict, making it challenging to project policy changes onto future earnings expectations. The current third-quarter earnings results have been strong, and management teams remain focused on delivering fourth-quarter results and 2025 earnings. Notably, very few have referenced the election through the latest results season, reflecting their focus on fundamentals, not politics.
The bottom line
As with past elections, we will not take speculative positions in portfolios based on potential outcomes. If Republicans win, market reactions are likely to be muted, if not, we will likely see some short-term repricing. Rather than attempting to guess the outcome, our objective is to ensure that our clients remain invested in quality businesses that can withstand different economic and political environments.
ENDS
