The impact of US elections on asset classes

Despite Joe Biden’s decision not to seek re-election and his likely replacement by Kamala Harris as the Democrats’ candidate, our base scenario remains a clean sweep by the Republicans in the presidential and congressional elections in November. However, a younger, invigorated ticket that enthuses and mobilises the Democratic base marginally dents the prospect of a Republican clean sweep. A Trump win with a divided government, our next most likely scenario, is now looking slightly more feasible. 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 they are not reciprocated), higher inflation and thus higher interest rates will likely drive the dollar higher against the euro (to USD 1.05 by end-2024) in case of a Trump victory. A Democratic victory could instead see valuation concerns 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.