In a US election that is too close to call, investors are weighing up what both candidates’ administrations may mean for portfolios.
With Donald Trump overtaking Kamala Harris as the candidate Americans trust most with the economy, according to a recent FT poll, investors are increasingly adjusting portfolios in anticipation of significant market shifts driven by the prospect of the former president reclaiming the White House in November’s election.
Rate expectations and the dollar have moved higher, with some polls shifting in Mr Trump’s favour, although recent strong data may explain most of the moves, according to investment professionals.
“We’re seeing a global trend where investors are recalibrating their portfolios to capitalise on a strengthening dollar while preparing for the potential inflationary effects of Trump’s trade policies,” says Nigel Green, CEO of finance firm deVere.
Assets that stand to benefit from a stronger dollar and rising inflation include dollar-denominated bonds, while investments in commodities like gold, historically seen as a hedge against inflation, are also becoming more attractive to investors. A stronger dollar also forces investors to reassess exposure to emerging markets and currencies vulnerable to dollar strength, while equity investors are re-evaluating exposure to sectors sensitive to inflation and trade policy changes.
Industries reliant on imported goods may face rising input costs, while domestic sectors with less reliance on global supply chains would likely benefit from protectionist policies, says Mr Green.
Yet, there is still much uncertainty, with election scenarios including a Republican or Democratic sweep, or a divided Congress with either candidate winning. There is also possibility of a contested election, which may lead to “risk off” in markets.
It is important to also assess the historical impact of US presidential elections on markets.
Since 1932, the average annualised price return for the S&P500 has been 8.9 per cent under a Democratic presidency and 5.6 per cent under a Republican administration, according to research by ClearBridge Investments. When assessing performance from a longer-term perspective, since the day after the election looking out on a 10-year forward looking basis, returns are similar for both parties. The annualised return of the S&P500 is 6.4 per cent for Democrats and 6.1 per cent for Republican presidencies.
Economic backdrop
“While policy matters, what matters more is the underlying economic backdrop,” explains Jeff Schulze, head of economic and market strategy at ClearBridge Investments.
Going back to Gerald Ford in the mid-1970s, eight out of the last nine presidents saw double digit annualised returns during their terms. One president, George W. Bush, however, had a negative annualised return during his tenure, defined by “pretty bad luck” when he took over the Oval Office, with the dotcom bubble bursting, followed by the 2001 recession. When he left office in 2008, the global financial crisis had already started.
“While a red sweep will be positive for markets for the first three to six months, investors should expect volatility and some pressure from immigration and tariffs towards the back end of 2025”
Jeff Schulze, ClearBridge Investments
Today, the US economy is on “solid foundations”, says Mr Schulze, believing probability of soft landing has increased to 85 per cent following positive developments, including a “blockbuster” September jobs report – quelling fears of labour market weakness – plus upward revisions of GDP, more resilient consumer spending and stronger profit margins.
While the Fed finally embarked on its long-awaited cutting cycle, the economic backdrop is not losing momentum, with further rate cuts likely to create economic reacceleration, bolstering prospects of a soft landing.
Markets ultimately dislike uncertainty, explains Grant Bowers, Franklin Equity Group’s portfolio manager. While today it is a “50/50 toss up for the presidential winner”, both candidates are “relatively well known to markets”. The economy, as well as equity markets, performed well under President Trump’s first term, he says, while Ms Harris’ presidency would represent continuation of many of President Biden’s policies, under which markets also produced strong returns.
Moreover, while differences between the candidates revolve around regulation, tariffs and fiscal policy, the most likely outcome is a split government, meaning chances of large-scale change are “pretty low”. These factors explain little volatility in the run up to the election, says Mr Bowers.
Headwinds from a red sweep
From a market and business perspective, there is “a little bit of hope” that Mr Trump wins, he says, because of his pro-business, low tax, low regulatory policies. This optimism has “creeped into market performance in the last few weeks, as some of the polls have jumped around”.
The contra to that is impact of tariffs and fiscal policies on debt levels. The market, though, does not believe Mr Trump’s proposed tariffs – 60 per cent on goods from China and up to 20 per cent on all other US imports – would be implemented in that form. If that happened, they would drive higher inflation, slowing growth, while significantly impacting consumption and the labour market.
“What the market is discounting and telling us is that any tariffs would be a much more scaled back version, and maybe more targeted on individual goods and services or goods and items like we saw last time [in 2016]. So, there hasn’t been a dramatic sell off in any areas in anticipation of tariffs.”
Rather than any meaningful impact on AI investments, a Trump administration would likely deregulate energy and financials, causing “truly directional change” if compared with the current Democratic administration, adds Mr Bowers.
An area that would be affected negatively in case of a red sweep would be clean energy. “I think there’s potential for rollback of subsidies in the Inflation Reduction Act (IRA), green energy and EVs. They could all face headwinds from a red sweep,” believes Mr Bowers, adding Mr Trump’s administration would look “not to dismantle the IRA but scale it back dramatically”.
Regulatory touch
Mr Trump’s lighter regulatory touch, compared to Kamala Harris, could be a small tailwind for equities overall, but investors should not rely too much on the regulations to make decisions, warns ClearBridge’s Mr Schulze, emphasising greater importance of underlying economics. “From a portfolio perspective, when you go back to the Obama administration, everybody thought healthcare would be a relative lagger, with Obamacare coming out, but healthcare did well relatively. Trump, in his first term, was pro energy, and energy was the worst performing sector during his tenure.”
At least initially, markets will perceive a Trump presidency as positive for growth, based on favourable tax treatment and lower regulatory burdens on capex intensive telecoms, healthcare stocks, industrials and tech firms, says Mr Schulze. In 2016, his election triggered the largest three month jump in the NFBI small business confidence series and a spike of individual investor sentiment. But in the mid-term, tariffs and potential lower immigration suggest a “murkier” outlook.
Tariffs, even if “watered down”, are likely to negatively affect economic growth, acting as effective tax to US consumers, while lower immigration will hit agriculture, construction, and logistics. “While a red sweep will be positive for markets for the first three to six months, investors should expect volatility and some pressure from immigration and tariffs towards the back end of 2025,” predicts Mr Schulze.
Entry point
Higher market volatility may offer good entry points. While it has ratcheted lower over the last couple of months, since July 1 the VIX index, a barometer for market uncertainty, is up more than 50 per cent, as usually seen in an election run-up. However, with the S&P500 having moved higher over the last couple of months, will investors ever find a good entry point?
Looking back to the last 10 presidential elections, six times out of 10, markets were negative the day after the election, because of “knee jerk reaction where it’s a sell the news type of situation”.
“I think we could have that dynamic again,” says Mr Schulze. Markets have been “front running a potential Trump presidency”, with financials recently the best performing sector, although some of that performance is fundamentally driven.
The 10-year Treasury has also moved higher, mirroring what happened eight years ago. “This means that, come election day, a sell the news type of situation is likely, with investors taking some profits of the recent price action,” suggests Mr Schulze.
Another entry point may present itself in the case of a contested election. The S&P500 could move lower, by 3 or 5 per cent, he predicts.
An equity pullback could also occur if 10-year Treasury yields continue to rise. “So far, equity markets have shrugged off the rise of the 10-year Treasury. But if we get to 4.5 per cent based on a Trump election, that may be too much for current valuations embedded into equities.”
If Ms Harris wins, that “run counter to what the market’s been pricing over the last couple of weeks, which could create a little bit of market downside”, he says. “That could offer investors an after-election opportunity to put money to work, he explains.
Relief rally
Bonds have already started pricing in a potential Republican sweep, less likely several weeks ago, says Sonal Desai, CIO, Franklin Templeton, fixed income. That is an acknowledgement of the fact that budget deficits are expected to become “a lot higher”.
“I do think that if you had a Democratic sweep, you would probably get a bit of a relief rally in Treasuries,” says Ms Desai. “That might not be fully appropriate, though, because, regardless of who wins, we’re looking at very large deficits, around 7 per cent of GDP, but I think you might still see that in the hope that there would be some increase in taxes, something to counterbalance deficit expansion.” On balance, given the expenditure expansion under a potential Democratic sweep and some level of tax cuts under a Republican sweep, the outlook is not particularly favourable for the long end of the yield curve, post elections, she adds.
A Harris presidency with a split Congress would likely be the most beneficial outcome for US bonds, with bond yields expected to fall, believes Raphael Olszyna-Marzys, international economist at J. Safra Sarasin Sustainable Asset Management.
“Harris’ policies would likely be regarded as less inflationary. A split congress would restrain Democrats’ fiscal spending plans, such that the likely deficit trajectory would be the lowest of all scenarios,” says Mr Olszyna-Marzys.
This scenario would be the most negative for the dollar and most favourable for the Swiss franc and the yen, with European and emerging market currencies benefiting from a more favourable stance on tariffs.
The probability of corporate tax hikes would be significantly reduced compared to a Democratic sweep, limiting earnings headwinds for the S&P 500, he believes. Financials face a less favourable environment than in a Republican win scenario, due to lower rates and unchanged regulations. Utilities would stand to benefit, with IRA tax credits upheld. Finally, equities outside the US may gain initially versus US equities, given lower probability of broad-based tariffs being implemented.
