The US election is getting ever closer, but clarity about the outcome remains as elusive as ever.
In terms of portfolio positioning, we’ve kept our focus on the long-term macro outlook rather than short-term political noise. We think that the outlook for the US economy remains pretty solid, with decent growth and lower policy rates. That should help to support financial assets.
Turning back to the election, we think there are three broad questions and no easy answers.
- Who will win the Presidency?
2. Will we see a split election (ie control of the House, Senate and White House is split between Republicans or Democrats) or a clean sweep?
3. What will the market reaction be?
On the margin, the polling suggests that the probability of a Trump presidential victory has risen, but it’s still too close to call. Probabilities are in the region of 55-45 or closer. By extension, that probably means that the prospect of a Republican sweep is higher, even if the base case is still for a split result. It’s also likely that it will take a few days for the final result to be confirmed, and that has the potential to add further confusion to the entire process.
As for the market reaction, history suggests that split results are the most positive for equity markets – implying that markets generally prefer some sort of legislative inertia. Historical trends also indicate that US equity markets can be quite subdued in the run-up to a Presidential election and then rally thereafter. But given the current polarised political environment, there’s the potential for volatility in the immediate aftermath of the election.
In terms of policy, very crudely Republicans most likely represent lower taxes, less regulation and higher tariffs on imports. That could mean that US equities do better than non-US equities, given the significance of the US market.
Equally crudely, Democrats should mean higher corporate taxes and perhaps marginally lower tariffs.
Shifts in consumer sentiment depend largely on whether you voted for the winner or the loser.
As for what’s priced into markets – that’s another unanswerable question. Commentators remind us that in 2016, the twin orthodoxies of “Clinton will win and markets will fall on a Trump victory” proved wrong on both counts.
The current Asset Allocation Team view is that equity markets probably reflect a Trump victory and are taking that as a mild positive, presumably based on the prospect of lower corporate taxes. On the fixed income side, the recent back-up in bond yields partly reflects a less optimistic outlook for interest rate cuts. That’s partly the result of stronger macro data, but investors are also aware that a Trump victory likely means higher tariffs and larger fiscal deficits – both of which could be inflationary – and possibly more political pressures on the US Federal Reserve.
*Capital at risk. Tax treatment depends on your individual circumstances and may be subject to change in the future.
