The impact of US elections on asset classes

Our base case is for a Trump victory in November with a unified government, conditional on Joe Biden staying in the presidential race. A Trump win with a divided government is our next likely scenario. We expect Trump’s policies on taxes, trade and immigration to be more inflationary than those of a Democratic administration. The fiscal deficit is likely to rise the most under a Republican sweep as Trump has proposed tax cuts that would not be fully offset by the revenue generated by his proposed trade tariffs.

Fixed income: In case of a Trump victory, higher inflation would likely constrain Fed rate cuts, and a higher deficit (among other factors) could also push the term premium higher. Hence, we expect the 10-year Treasury yield to rise to 4.9% if the Republicans win control of the presidency and Congress, and to 4.6% in case of a divided Congress. A Democrat win in the presidential election would be the most favourable outcome for US Treasuries in our view, as further disinflation could enable the Fed to cut rates more aggressively than markets currently price. In this case, we would foresee the 10-year US Treasury yield falling below 4% in 2025, likely to a level around 3.7-3.8%.

FX: The rise in trade tariffs (if not requited), higher inflation and thus higher interest rates will likely drive the dollar to EURUSD 1.05 by end-2024 in case of a Trump victory. A Democratic victory could instead prompt valuation concerns to return to the fore and lead to gradual USD depreciation.

Equities: While political news flow can create short-term volatility in equity markets, longer-term performance will reflect the extent to which political decisions impact economic growth, interest rates and profit trends. We do not believe any of our four main scenarios for the November elections explicitly represents an outright ‘good’ or ‘bad’ outcome for stocks given that each contains a mixture of implications. While we believe a Republican victory is likely to lead to a bigger ‘knee-jerk’ equity rally initially, this does not imply that a Democratic presidential win would represent a negative for US stocks.