Key takeaways
President Joe Biden’s unexpected departure from the race set up a showdown between Democratic Vice President Kamala Harris and Republican former President Donald Trump.
The presidential race is considered too close to call, leaving markets uncertain about a likely winner.
While public interest in the election is high, it helps to maintain a proper perspective regarding any potential impact on capital markets based on election cycle outcomes.
As the 2024 election season enters its final days, the race for President remains too close to call. Democratic nominee, Vice President Kamala Harris, and Republican nominee, former President Donald Trump, continue to run neck-and-neck in both national polls as well as in key “battleground state” voter surveys.1 The state level vote is the most important, as the Presidency is decided by the electoral college outcome based on the election results in individual states. At the same time, all 435 U.S. House seats (the House is currently narrowly controlled by Republicans) and one-third of the 100 Senate seats (Democrats have narrow control of the Senate) are up for election.
To this point, capital markets seem little influenced by election outcome speculation. Could that change once results are known after the November 5 election? “We would likely need a more decisive outcome, meaning a sweep of the Presidency and both houses of Congress,” says Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “It’s difficult for the most significant policy proposals to take effect without one-party control, and that’s when markets might become more reactive.”
Haworth says it’s possible that the election winner’s broad policy initiatives could have some capital market impact. “But the more likely impact is at the sector level, with certain industries benefiting from new policies, while others may face more headwinds.” Haworth says it will likely take time to sort out the potential winners and losers based on election outcome results.
“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 inclinations don’t always translate into obvious market impacts. “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.
“For now, the market is more focused on third quarter corporate earnings,” according to Haworth. “It isn’t likely to price in any election factors unless there’s a meaningful change to expectations.”
While the presidential contest’s dimensions have changed since Vice President Harris replaced President Joe Biden at the top of the Democratic ticket in July, what’s not clear is what the implications could be down the ballot, particularly with House and Senate races that will determine Congressional control.
Here, too, a small margin may determine control beginning in 2025, with winners in many closely contested seats difficult to predict. It is conceivable that the election outcome could result in one-party control of both houses of Congress and the presidency, or a split between the two parties, as exists today.
National polls recently gave a slight edge to Harris, but don’t accurately reflect the impact of electoral college nuances. The plots shown here provide an average of national polls, with the 30-day average aggregating each candidate’s percentage of respondents intending to vote for respective candidates.
Prediction markets are a recent development to assess likely election outcomes. It allows people to trade contracts reflecting expectations of specific outcomes. While Harris had built a modest advantage in recent weeks, in early October prediction markets narrowed to a virtual tie.
Tax policy has drawn significant attention. 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, along with other prospective tax cuts his campaign proposes, lower tax collections could ignite new federal budget deficit concerns. 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).2
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%.
Vice President Harris has focused more specific proposals for expanded child tax credits and credits for first-time homebuyers.3 In the meantime, Trump recently proposed cutting the corporate tax rate to 20%, and as low as 15% for companies manufacturing products in the U.S.4 Both Trump and Harris have also stated support for eliminating taxes on tips for service and hospitality workers.5
Additionally, Harris proposes increasing the capital gains rate on top income earners from 20% to 28%.6 As for Trump, he supports tax deductible automobile loans, and an end to taxes on Social Security benefits, and other tax breaks.4
Tariffs, particularly those placed on Chinese goods, have emerged as a significant 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. Trump has discussed the possibility that, if elected, he would consider implementing far more sweeping tariffs. Either candidate as President is likely to pursue fiscal stimulus policies to boost the economy, although likely with different combinations of tax incentives and higher spending.
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 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.”
How have election outcomes affected market performance in the past and how might potential scenarios play out in the 2024 presidential election?
U.S. Bank investment strategists reviewed market data going back to 1948. Using average 3-month returns following each election outcome—and comparing those with the average 3-month return during the full analysis history—strategists calculated the statistical significance of the relationship between political control and market performance using a calculation called a t-statistic, or t-test.
A t-test determines whether one group of variables (in this case, the political composition of the White House and Congress) has a measurable effect on another variable (in this case, average three-month S&P 500* returns during the control period).
The analysis also looked at the exact periods of time when parties took control of different branches of government (rather than starting from election dates themselves), although this analysis resulted in similar outputs and conclusions.
Results of the analysis contradict conventional wisdom that a Republican or Democratic “sweep” of the presidency and Congress is most likely to cause market disruption. In fact, historically there has not been a statistically significant relationship between single-party control of both the White House and Congress and market performance.
Rather, the data uncovered three divided-government outcomes with a statistically significant relationship to market performance.
Two scenarios corresponded to positive absolute returns in excess of long-term average returns:
One scenario corresponded to positive absolute returns modestly below long-term average:
While investors may closely monitor election results for their potential effect on stock market performance, it’s important to recognize that other factors that may have greater impact on their portfolios. The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
In general, rising economic growth and falling inflation have been associated with returns that are considered above long-term averages, while falling growth and rising inflation have corresponded to positive but below average market returns. For investors, staying focused on these patterns is probably more insightful than potential election outcomes when it comes to forecasting market performance.
When looking at midterm election data (elections held in between presidential elections), U.S. Bank investment strategists found that the S&P 500 consistently outperformed in the year after midterms compared with non-midterm years. Just like presidential elections, which party controls Congress generally was not a factor in projecting overall equity market performance.
These equity and bond market trends were consistent over time unless there was a dramatic disruption. Read more about how midterm elections affect the stock market.
While the analysis doesn’t point to elections having a meaningful medium-to-long-term market impact, they could affect individual sectors and industries. Different election outcomes have the potential to affect proposed policies, regulations, or global conflicts.
The following are policy issues to monitor throughout the presidential nomination and election process:
In any election, there’s also the potential for delays in verifying an election victor, particularly in closely contested races. At the presidential level, this occurred in both the 2000 election (settled with a Supreme Court verdict) and 2020 election (when the result was challenged by one candidate). In these instances, ensuing delays could lead to more uncertain election outcomes, in which case riskier asset classes might decline until clarity emerges.
While the Presidential campaign garners the greatest attention, the composition and control of Congress is another aspect of this year’s election cycle that bears consideration. It also makes sense to keep an eye on which sectors are most likely to be affected by the potential for key policy changes. Investors are well served to focus most on factors such as economic growth, interest rates, inflation and corporate earnings when making portfolio decisions.
Stay up to date on the latest market news and activity.
*The Standard & Poor’s 500 (S&P 500) is a well-known, broad capitalization weighted index of U.S. stocks. The index has one of the longest histories amongst U.S. indexes.
Historically, there does not seem to be a clear connection between the outcome of a Presidential election and capital market performance in the medium- to long-term. Two scenarios corresponded to positive absolute returns in excess of long-term average returns – Democratic control of the White House and full Republican control of Congress; or Democratic control of the White House and split control of the Senate and House. One scenario corresponded to positive absolute returns modestly below long-term averages – Republican control of the White House and full Democratic control of Congress.
There doesn’t seem to be a direct link between the occurrence of an election year and market outcomes. The stock market, as measured by the S&P 500, was down in three of the 16 presidential election years since 1960. It experienced negative returns in seven of the 16 non-presidential election years. Typically, other factors such as the state of the economy, interest rates, inflation and corporate profits have a greater bearing on broad stock market performance.
It’s important for investors to avoid anticipating election outcomes, the potential impact of those projected outcomes, or actual election results. Investors should discuss their current portfolio positioning with their financial professional, and determine, by assessing all factors, including changes in personal circumstances and economic and market developments, whether any changes are appropriate.
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