Elections bring uncertainty and volatility. They can also bring endless nonsense to your inbox. While turning off social media is tempting, the impacts of elections are too important to ignore. As an antidote, LearIM has launched “Stock the Vote” (STV) to share non-partisan, fact-based analysis. We explore politics from the perspective of an investor. Each party has a separate set of facts, but STV offers a third perspective to navigate 2024.
Below is the outline for our analysis of the impact of the elections on capital markets.
Now What?
The presidential primaries have produced enough votes for a candidate from each party to be selected. The stage is set for another battle between Biden and Trump for the “Leader of the Free World” heavyweight championship. This fight reminds us of the other blockbuster fight scheduled this year—Mike Tyson vs. Jake Paul.
Both matchups feature two participants that probably shouldn’t be in the ring at this stage of their careers. While we can elect not to watch the Tyson-Paul boxing match, we must pay particular attention to the U.S. presidential election for the impacts on capital markets.
The election is six months away and the issues facing investors continue to take shape. There are two economic issues discussed in this month’s Stock the Vote: taxes and foreign policy.
But First …
Before we dive into the issues, let’s look at the polls and betting odds. A friendly reminder: we are nonpartisan investors. The below is cut and pasted from independent sources with the intention of reporting the facts. Several reputable polls reveal a shift in favor of Biden since our last report. See below for results from https://www.realclearpolitics.com/ May 2, 2024.
This is a unique election because we have data from two previous elections with Trump, both a winning and a losing campaign. For example, the polls have taught the political world to add 2-3% to Trump’s numbers in certain states. Turns out, many voters don’t admit voting for Trump when asked, yet they do in fact vote for him when in the privacy of a voting booth.
Next, we turn to the betting odds for an alternative look at the election from www.oddschecker.com on May 2,2024.
The betting odds reveal a similar picture to the polls—Biden has gained ground, and the odds are almost even now. Betting odds are less predictive of the outcomes with this amount of time remaining before the actual election date. The oddsmakers are looking to set a line to entice bets on both sides given the moment in time.
Does POTUS Even Matter to Stocks?
As we mused in the two previous STVs, the party of the president may not be the most important factor directing capital markets. There are additional factors for investors to consider. For example, the winners of the Senate and House are an important component of how markets react. We will cover the congressional races in future issues.
Tax the Vote: Increased Revenue
No matter who wins, the president will inherit a very different situation than they did the first time in office. The ballooning federal deficit in combination with high interest rates creates less appetite for additional spending programs or tax cuts. This year presents a unique set of challenges and opportunities, differentiating it from the political landscapes of 2016 and 2020.
One place to look for a difference in policy is taxes. Under Trump there were tax cuts, but as mentioned last month, these tax cuts expire at the end of 2024, so a decision must be made to extend, modify, or sunset back to higher rates. With the federal budget deficit soaring, we believe tax cuts have a lower probability of gaining support. If there are tax cuts, where will the government look for increased revenue to stop the deficit from ballooning?
Tariffs on exports are another place to look for increased revenue. The tax on goods and services entering the U.S. from other countries will certainly be a topic of discussion. We all remember the large list of items from China taxed under Trump. While Biden remained strong on tariffs for Chinese goods, his administration did discuss lowering tariffs to control inflation; however, this week, the Biden administration actually increased tariffs on Chinese steel by three times the current rate. This smells like an effort to help attract voters in the swing state of Pennsylvania. The Trump campaign is discussing further drastic measures to increase government revenue by taxing goods from other countries with China as the main target. In a recent interview, Trump suggested 60% tariffs. This tough action would reignite a trade war with China.
Regardless of who wins, the president-elect will inherit a very different economic situation than the first time around. Taxes, including tariffs, will be a major issue on the campaign trail. But today, war is what’s on voters’ minds, not taxes.
Foreign Policy: Two Wars
The U.S. is engaged in two wars: Ukraine and Israel. The war in Ukraine lost top billing to the Israel/Iran conflict. The situation intensified as Iran retaliated for the Israeli attack on the consulate in Damascus, then Israel acted again by firing back at Iran. Thus far, both moves have been well telegraphed and have resulted in minimal damage. However, the battle in the Middle East is perceived as a bigger threat of escalating into a global war than the situation in Ukraine.
The U.S. is doing its best to walk the line between becoming involved with military action, but the world will be watching its decisions closely.
The most notable economic impact of increased fighting in the Middle East can be seen in the price of commodities. Gold and oil are both areas that could rise in price if tensions continue to flare. At this point it is not clear if either candidate would have done anything different at this stage of the Middle East conflict. However, we know that Trump has a much louder bark than Biden and this could be viewed as a negative for global stability.
Conclusion
Does the president matter? Or is the president a function of the situation in which we are living? Consider Biden’s first year in office: it was COVID recovery and stock markets soared. Would another president have done things differently? With interest rates near zero, there wasn’t much else to analyze.
The situation today is unlike previous election years; thus, investors must not solely rely on the past performance of election-year stocks, but rather examine the current issues, and we believe foreign policy and increasing revenues are the issues worth watching.
Disclosures