Taking the measure of Trump and Harris

A Donald Trump presidency is likely to be good for US equities and less positive for US government bonds. A Kamala Harris victory would be good for emerging market assets but less so for the US currency.

But there’s another layer of complication – it’s not just who wins the presidency, but also who controls Congress.  And while there are clear and strong implications for specific groups of assets, history suggests that the overall market impact will be modest – here, fundamentals rather than politics tend to determine market direction.  

Irrespective of who wins the presidential race between Kamala Harris and Donald Trump, we see the US economy remaining on its path to a soft landing.

Where the impact will be felt, however, is government bonds, equity markets outside the US, equity sectors and styles, especially pronounced over a period of between three to six months.

Analysing US election cycles since 1972, there’s no evidence to suggest equity markets do better under the presidency of one party or the other.

In general, there tends to be a moderate post-election bounce in equities, though this is hard to distinguish from the usual fourth quarter seasonal gains seen in non-election years.

A rare exception was the 2016 election cycle. Trump’s victory had a clear impact on trades exposed to his policy priorities, from US drillers to the Mexican peso, through to mid-January and then drove overall markets higher later in the year thanks to his Tax Cut and Jobs Act.

But that sort of boom isn’t likely to happen this time round, even with a Trump victory – the policy gap between the two parties is smaller now, not least because of the much more limited fiscal headroom than there was eight years ago.

As a result, we expect a more muted response from markets. That’s notwithstanding the outcome is impossible to call and even though the policy implications of the four main possibilities range from status quo in the event of a Harris victory with a divided Congress, to a "pushing the envelope until something breaks" should a Trump victory be accompanied by a Republican sweep in Congress.

Betting market odds are in the same ballpark for all the four main outcomes: a Trump victory with either a clean sweep or a divided Congress and the same for Harris. 

The market, of course, tries to anticipate implications and there’s been some pre-election movement. Correlations of asset pricing with election outcome expectations have picked up, but so far our composite "Trump trades tracker" has performed exactly in line with betting market odds. Simple average of Russell 2000 has performed exactly in line with betting market odds.vs S&P equal weighted, US Banks vs Global Financials, US Pharma vs US defensives, God Bless America ETF vs ESG leaders, US O&G equipment vs Global Energy, Short US Aerospace versus Global industrials, all detrended to remove preexisting fundamental drivers’ impact

This suggests that investors aren’t taking an active view on who will win, but rather are only tweaking their portfolios as per polling data and wider expectations.

One of the clearest Trump trades so far has been gold, given his belligerent stance on trade and willingness to weaponise the dollar keeping demand for diversification well supported among emerging central banks.

A Trump victory should also be good for the dollar despite his platform’s stated goal of a weak dollar to support exports. Credit markets are likely to be relatively well insulated in any outcome as we believe the impact on earnings from policy shifts will not be large and the default cycle is unlikely to be affected.

But beyond that, market implications are likely to be more nuanced and the four probable outcomes are worth a closer look:

Benign US exceptionalism
– Trump president, divided Congress. This is likely to be broadly neutral for economic growth and only marginally positive for markets. Trump’s America first approach suggests he’ll make protectionist tariffs a key policy, especially against China. Without a Congressional majority, he’ll find it harder to institute big fiscal programmes. Overall the trade and immigration policy mix is unlikely to be stimulative for the US economy but would be inflationary – and therefore mildly negative for bonds. The main trade for this outcome is long US equities, especially small cap which would particularly benefit from lower taxes and a broad policy agenda favouring domestic companies. While most emerging assets would suffer, we would expect domestic growth stories such as India, insulated from any anti-China measures, to fare better.

Pushing the envelope
Trump president, Republicans control Congress. Here, Trump has the power to institute a more radical programme. The federal debt will go up sharply – double the increase under Harris, according to the Committee for a Responsible Federal Budget. That’s on top of potentially harsh tariffs, including the threat of a 10 per cent universal baseline. This in our view is a very negative outcome for US treasuries. And though Trump is a big supporter of US oil and gas production (and anti-renewables), his push for greater domestic energy supply is unlikely to cause prices to fall by much, offset by oil demand staying stronger for longer. On balance, this is likely to drive inflation higher forcing corporate bond spreads to widen and the yield curve to steepen. This result favours US equities and the dollar and is negative for non-US equity and bond markets, not least emerging market debt. Within equities, banks stand out as a clear winner benefiting both from higher yields and potential deregulation.

Almost status quo
Harris president, divided Congress. This is the scenario closest to maintaining the current policy mix and priorities. It’s an outcome that is both neutral for economic growth and inflation and while the result is likely to be higher budget deficits, the deficits won’t be as big as those under Trump. Industries exposed to industrial policy from semiconductors to renewables are likely to breathe a sigh of relief: Harris won’t be as protectionist as Trump and is in favour of a low-carbon economy. The main trades here are to go long Japanese equities and emerging markets, long renewables, autos and infrastructure plays and short the US dollar.

A knee-jerk risk off
Harris president, Democrats control Congress. A Harris sweep is likely to lead to a risk off phase. Higher corporate taxes and heavier regulatory involvement – both of which part of Harris’ policy programme - would initially at least be perceived as bad for markets, even as fundamentals ultimately assert themselves. The net result is for slightly higher deficits, with no significant impact on inflation and consequently neutral to modestly favourable for fixed income, but negative for US equities and other risk markets. Key trade ideas are long Switzerland and China – defensive stocks in the former, less anti-trade bias in the latter – and short US equities.