The US election will impact markets

There will be different effects on markets depending on who wins the US presidential election on 5 November. However, whether Joe Biden or Donald Trump will emerge victorious remains unclear.

| 12 min read

The early decision by the Democrats to back Joe Biden and the Republicans to back Donald Trump means this presidential election now has seven months of campaigning by the candidates, unencumbered by the need to please their core supporters to ensure their nomination.

This week, Mr Trump has decided to use this freedom to refuse to go further to stop abortion, though many of his core voters are Christians who want to defend the unborn child. The next big dates in the official election diary are 15 July for the Republican Convention, 19 August for the Democrat, 16 September for the first Presidential debate, and 5 November – election day.

Current polls

The polls show the two candidates are close to each other. Both men are gaining popularity now they are the established candidates, rising from the low levels they both started with. Mr Trump was fractionally ahead in most polls in March, with Mr Biden slightly ahead in the latest week.

The Trump lead is a little higher when the polls ask about a three-way contest including Robert Kennedy as the third candidate. Although Mr Kennedy has adopted policies from both left and right, he seems to be drawing a little more from Biden than from Trump. His family is, of course, strongly identified with the Democrats from their past political activities.

Mr Trump seems to be slightly ahead in the crucial swing states of Arizona, Georgia, Michigan, North Carolina, Nevada, and Pennsylvania, with a tie in Wisconsin. Everything is so close it means both men can believe they will win – and both will redouble their efforts to please groups of voters in crucial areas that could make all the difference.

Foreign policy

President Biden sees his approach to foreign policy, based on more conventional diplomacy and using the normal diplomatic channels, as superior to Mr Trump’s highly personal diplomacy of the deal where hard-line rhetoric often preceded a negotiated settlement. Mr Biden dislikes Mr Trump’s showier threats and sometimes dismissive approach to allies.

Mr Trump argues that Joe Biden threw away Afghanistan by a chaotic and ill-judged withdrawal – and was wrong to try to reach a friendly settlement with Iran. Mr Trump’s Middle Eastern strategy was based around peace treaties and cooperation between Saudi Arabia, the Gulf states and Israel, identifying Iran as a common enemy. Mr Biden responds that he inherited the withdrawal policy from Afghanistan. Mr Trump points out that he withdrew a lot of troops but maintained a base and a presence there, not letting the Taliban back in. Mr Biden condemned Mr Trump’s remarks about Nato members that do not pay their way, although Mr Biden himself must adopt the Trump demands that the rest of Nato should at least get to the minimum 2% of GDP level in their spending.

China will play up Mr Trump’s comments about Taiwanese competition in microchip chips and overlook his close relationship with the Taiwanese president at the start of his period of office. Mr Biden has deviated from the official US policy of studied ambiguity about Taiwan to imply he would go to Taiwan’s defence without hesitation in the event of a Chinese invasion.

Mr Trump has preserved the official policy but is unlikely to allow China to take Taiwan unchallenged. He is threatening a general tariff of 10% on all imports and super tariffs on Chinese products, still preoccupied by the trade deficit and US dependence on Chinese supplies. President Biden has progressively tightened restrictions on trade in technology products with China, which Mr Trump would continue.

Overall foreign policy is a bit negative for the incumbent president, with the Gaza war upsetting many voters concerned about civilian deaths, and the long exhausting Ukraine war not offering the prospect of early Western victory. Mr Trump has stayed very quiet about the two main conflicts. He has encouraged his supporters in the House to make migration and the southern border a priority over more money for foreign wars which someone in opposition can do. Mr Trump has not explained his comment that he would end the Ukraine war once in office. He has warned Israel against losing international support for its conduct of the Hamas war.

It’s the economy, stupid

Compared to the European economies, the US has performed relatively well, sustaining a decent growth rate whilst hiking interest rates to bring down inflation. President Biden hopes voters will swing more to him as inflation falls further and if growth and jobs are sustained. US voters, however, dislike the rapid inflation during Biden’s tenure of office and people living on credit and with mortgages worry about the high interest rates now imposed to correct the error. Mr Biden’s ratings on the economy are weak and suffer particularly when the price of gasoline soars as US drivers feel the impact directly on their family budgets.

Mr Biden would let the Trump tax cuts expire in 2025 and favours higher taxes on corporations and rich individuals. He put through a large stimulus package with subsidies for onshoring more investment in the US and has allowed a substantial increase in the deficit. He promotes the green agenda with many of the subsidies slanted to green growth. He changed the personnel of the Federal Reserve (Fed) and avoids public commentary on their actions. His Treasury Secretary is a former Chair of the Fed and the central bank works closely with the administration in pursuit of its twin goals. Mr Biden is offering more of the same and must promote his record in office against the current background of scepticism.

Mr Trump has stated that he will remove many of the special subsidies and regulations that favour green products like electric vehicles. He will continue to favour Made in America and will want subsidies and tax breaks for general investment. He has not come up with any specific pledges for lower taxes and would need to work away with Congress to renew his past tax cuts.

Mr Trump was not worried about increasing the deficit when last in office and has made no promises on it so far this time. He has proposed a general 10% tariff on all imports which would put prices up before it could have any favourable impact in encouraging more domestic import substitution. The combination of more tariff revenue and lower spending on green matters would give him scope for some tax cuts but he would need votes in Congress to deliver them. He also plans to promote more domestic oil and gas extraction, which would yield more tax revenue.

Neither man is getting many plaudits for their economic proposals. So far, the anger about inflation and recent past performance seems to be doing more harm to Mr Biden than Mr Trump.

Mind the borders

Under President Trump, various measures were imposed to limit numbers entering the US, particularly across the Mexican border. Monthly totals were below 50,000 2017-20. Last December, they hit 250,000 for the month and have been averaging near 200,000 for much of President Biden’s time in office.

Many US voters think this is too many and think the Administration should impose more effective controls. The House Committee on Homeland Security issued its highly political statement that “final FY numbers show worst year at America’s borders ever” and said there had been 7.5 million arrivals under President Biden up to the end of FY 2023. (“Startling Stats” House 26.10.23)

The president wants to get this issue off the agenda. He has agreed to the building of a bit more border wall and looked at further executive actions. His main response has been to develop and encourage more use of legal means of entry. Republicans look as if they will keep hammering this issue as they think it adds to their vote.

Women’s reproductive rights

Donald Trump has crafted the message that he would be tougher and more conservative in a second term, moves which likely helped him win large majorities in the early primaries. Still conscious of the need to motivate his core Christian demographic, he says the presidential election will offer voters the chance to vote for a more avowedly Christian administration that will “defend” religion. Mr Trump reminds those voters that he kept his word last time to place more Conservative judges on the Supreme Court. President Biden likes to talk about the subject of reproductive rights to steer away from difficult questions on foreign policy and inflation. Mr Trump has seen the damage the debate is doing to him with some voters, so has moved to control it as best he can. This shows that the Trump campaign is serious about winning and is not going to be too indulgent of Conservative proposals that get in the way of votes.

The Fed will have some impact on the election too.

The Fed will have some impact on the election too. If there were interest rate cuts before the vote, as many expect, that could help consumers who have taken on substantial borrowings – and it could provide some boost to the housing market which has been harmed by higher mortgage rates. The Fed is considering reducing the amount of bonds it sells each month. These bond sales have helped keep mortgage rates higher, as mortgage rates are related to the interest rates on government debt reflected in the bond prices. The more inflation and rates come down the more benefit there is likely to be for Mr Biden.

President Biden has flexed the student loans again, allowing more people to write off some of their debts. Attracting more high-tech and general investment is helping the president. Mr Trump has taken to explaining the rising stock market as people expecting him to win, as he sees the stock market level as a commentary on the government and so a plus for Mr Biden.

On Mr Trump’s side would be any further advances in the oil and gasoline prices which would remind voters of what they most disliked about the Biden years economically. He will benefit if the numbers arriving at the borders remains elevated. Every day the president has to firefight over Gaza or Ukraine is a win for the challenger.

Both men will see their stance on green matters as an advantage, as they are appealing to two very different audiences. Mr Trump will command the votes of climate-change sceptics, and all those who like cheap fossil fuels for their driving, air flights and industrial activities. Mr Biden will attract the votes of those who think climate change is the major challenge of the era and want government to take strong action to decarbonise.

We cannot improve on the polls today, which imply a very close contest. Given how similar the ratings of the two men are – and how long there is to run to election – it is too early to make a firm call. It means when planning portfolios, we need to be ready for two different approaches. The biggest differences are over green and energy investments, tariffs and the balance between tax cuts and subsidies.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

The US election will impact markets

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