US Elections: Kamala or Trump, who will be better for markets?

As before every US election, anticipation is building for the November 5th electoral consultation, and predictions are multiplying about which assets will perform best in case of a Harris or Trump victory.

The two candidates have different economic programs that could have a different impact on the markets. Not all the proposals are detailed and much can change between the promises and the effective implementation.

In any case, Kamala Harris is more for and increase corporate tax rate and the capital gains tax rate. Donald Trump, on the other hand, wants to introduce a 60% tariff on Chinese goods and a 10% tariff on all other imports. The former president also wants to cut corporate taxes, deregulate business. 

They also have very different priorities in terms of green transition. A Trump administration will slow down or reverse the green energy transition in the United States. Kamala Harris would probably largely mirror and build upon the Biden administration’s climate and energy policies.

As far as the fiscal deficit is concerned, both are expected to increase debt further, Kamala Harris through an increase in spending and Trump through a cut in taxes. The move higher in yields of these days is pricing in increasing funding requirements by the Treasury.

The reaction of markets will also depend on how the Congress is split. Winning control of both chambers of Congress for each of the Parties, a so-called red or blue sweep, would mean being able to implement the electoral proposals more easily. Usually, the market does not like radical changes and is happier with a split control of the Congress that helps to limit the changes of the status quo.

If we look at the election years of the last 40 years, the current one is particularly benign in terms of returns, despite the huge geopolitical tensions of the last months. Valuations are also relatively high, which means that expectations regarding earnings growth are optimistic.

As can be seen in the graph, except for 2008 (the year of the great financial crisis), all years have had positive returns.

Source: Bloomberg

This is not enough however to infer much regarding index moves or relative movements between sectors. Regarding the effects of elections on financial markets, there are two sets of considerations to be made:

1. First, pre-election predictions are often proven wrong. In 2016, for example, Hillary Clinton was widely favored, and in case Trump had won, a market crash was expected. These predictions were both disproven because Trump ultimately won, and the markets did not crash. This year Trump seems to be ahead, but still everything is much uncertain.
2. Secondly, for the long-term investor, it doesn’t change much in the end. As shown in the graph below, the stock market has always risen in the long run, regardless of the short-term volatility caused by elections and regardless of whether a Democratic or Republican candidate wins. Usually republican programs are considered more market friendly, but in the past large gains coincided also with democratic presidents.

So, all in all, the long term investor should not be much worried about elections. They can certainly cause some market volatility or some oscillation in the sentiment of investors, but at the end what drives equity markets over the long end is the capacity of companies to produce earnings, and this should not be impacted significantly by who wins the elections.

It is advisable to ignore market noise as much as possible and stay the course with your long-term plan. 

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