How issues might play out
Tax policy is one issue beginning to take shape. The most visible discussion centers on what happens to provisions of the Tax Cut & Jobs Act (TCJA), most of which are set to expire at the end of 2025. When passed in 2017, the package represented the most prominent domestic policy initiative of the Trump administration. If the provisions are extended, keeping tax rates lower, as former President Trump proposes, it creates new federal budget deficit concerns from the resulting tax collection reduction. To this point, the Trump campaign hasn’t specified how to address deficit concerns, although it has raised the possibility of additional tariffs on imported goods as a method of boosting revenue (more on tariffs below). 1
If some or all provisions of the TCJA aren’t extended, tax rates could be higher for up to 60% of tax filers. Other expiring provisions would impact the standard deduction, child tax credits and estate and gift tax exemption amounts and tax rates. For corporations, an expiration of TCJA would result in the top corporate tax rate moving from 21% back to 35%.
President Biden has indicated he will propose extending tax breaks for those earning $400,000 or less. At the same time, he is proposing that provisions benefiting those earning more than $400,000 be allowed to expire. Biden has also proposed raising corporate tax rates and implementing a global minimum tax. 1 Trump recently proposed cutting the corporate tax rate to 20%. 2
Much more discussion and definition around potential tax policy is likely in the months ahead. “It’s still too early for investors to game out exactly how tax issues will play out over the election season,” says Haworth.
Tariffs, particularly placed on Chinese goods, have emerged as another issue. During his term as President, Trump implemented tariffs, and President Biden continued most of them and recently added more tariffs, reflecting a move away from previous free trade policies. Both are likely to pursue fiscal stimulus policies to boost the economy, although likely with different combinations of tax incentives and higher spending.
Haworth says party control may have more impact at the sector level. “For example, if Republicans win, there is likely to be more of a push for development of fossil fuels, while a Democratic win might further promote renewable energy development.” Yet Haworth says such policy tendencies don’t always translate into investment outcomes. “Ironically, businesses tied to renewable energy saw their stocks perform better under the Trump administration, while stocks of oil companies and other traditional energy companies have performed better under the Biden administration,” notes Haworth.
An old saying goes that “elections have consequences.” But how do those results influence capital markets? And what are the potential ramifications for you as an investor? To better address this question, U.S. Bank investment strategists studied market data from the past 75 years and identified patterns that repeated themselves during election cycles.
The analysis points to minimal impact on financial market performance in the medium to long term based on potential election outcomes. The data also shows that market returns are typically more dependent on economic and inflation trends rather than election results.
What may be more important to investors is what the parties represent. “Party platforms, which are hammered out at this summer’s national conventions, often tell the markets more important information than the name of the winner or loser of the general election,” says Haworth. “Investors will try to determine which party is likely to be in power, and how that will benefit particular industry sectors of the market.”
Current polls indicate that, not unlike the elections of 2016 and 2020, we can expect a tight presidential contest ahead. Keeping in mind that the race is decided by electoral college votes, Trump currently holds a modest lead over Biden in most of what are considered “battleground” states, the ones that could tip the balance of the election, with the candidates in a virtual dead heat in several of those states. 3 However, it’s important to keep in mind that electoral dynamics could change prior to election day on November 5, 2024.
How have election outcomes affected market performance in the past and how might potential scenarios play out in the 2024 presidential election?