Investors should gird for a US post-election roller coaster

The period between the outcome of the US election and the presidential inauguration is likely to be tumultuous for the markets, says Capital Group political economist Matt Miller.

Thursday, August 29th 2024, 12:59PM

by Andrea Malcolm

In a webinar considering the impact of various election outcome scenarios, LA-based Miller's opinion was that the November 5th election will be decided on a coin toss.

“If, after voting, it’s a close call - investors need to be prepared for real tumultuous periods between Nov 5 and Jan 20, when the next president is inaugurated because we should expect challenges with both sides saying they really won. Both sides are preparing themselves with armies of lawyers.”

Miller said people outside the US need to understand that on the centre-left of the American system, there is a deep frustration with what are seen as structural barriers to majority rule; the Electoral College (EC) and the structure of the US Senate. So small states like Wyoming and Montana have the same number of senators as big states like California and New York.

Trump won the 2016 election with 78,000 EC votes in three states despite losing the popular vote by more than 2 million. In 2020, Biden won with seven million popular votes but only 44,000 Electoral College votes in three states.

“I think if Trump wins in a close race, especially if there are disputes afterwards, there will be persistent protests and levels of frustration that boil over.”

Senate block

More clarity as to the election outcome may come after the first debate on September 10 and as Kamala Harris does more unscripted interviews as so far she has mainly stuck to scripted and therefore more protected events.

To win the EC, which is what wins the presidency, Harris will need to be ahead by 3-4% in the polls and there’s a real built-in bias towards the Republicans right now, said Miller. After arguably her best month so far, and Trump’s worst, she is only up 1.5% in most national polls. Miller said the Senate is likely to go Republican. Whoever ends up with the tail wind to win the presidency is likely to carry the House.

Two most likely

The two most likely scenarios are that Harris would win with a Democrat Congress but a divided government because of a GOP senate, or there would be a Republican sweep if Trump wins. The likelihood of a Democrat sweep is very low, he said.

Inevitably there would be a big tax conversation and a tax bill in 2025. If Democrats have any corner of power in Washington, they would raise corporate taxes from the 21% that they were lowered to. “Investors should be prepared for the corporate tax to go up 23-25% if the Dems win,” said Miller.

Harris would maintain more robust support for Ukraine than Trump. On the regulatory side she wanted clean energy, more regulation on big banks, efforts to rein in drug pricing, more scrutiny of M+As and trusts, and a tougher outlook on antitrusts. The deficit outlook would still be large under Harris, but probably less fresh debt than the GOP sweep scenario.

With a GOP sweep, Trump likes low interest rates and has joked that he should be on the Fed board himself which has scared some people but. Miller said, there’s no risk to the institutional laws of Fed independence.

“I think Trump cares about markets and how they react and he’s not ideological at all. If, for whatever reason, markets have a dramatic negative reaction to what he does on the trade side, for example, he will recalibrate and retweak.”

While Trump is flexible on policies, one conviction he does have is that the US is being taken advantage of and tariffs are perhaps the best negotiating tool a president has exclusive control over to reset the table and force people to modify, said Miller.

On the corporate tax rate, Trump has talked about cutting it to 20%, he would try to free up restraint on traditional energy firms and ease regulation on banks. On pharma he sounds more like a Democrat and would come back with a previous idea to do some kind of international reference pricing. There would be less scrutiny of M+A but big tech would still be vulnerable. Miller thought Trump would try to force Russia and Ukraine to the negotiation table.

Drill baby drill

On Trump’s pursuit of hydrocarbon versus Democrat pursuit of clean energy via various infrastructure acts including the Inflation Reduction Act, there would be fierce Republican debate. “There will be a chunk of support in the Senate and house, maybe including Trump, to try to remove a bunch of subsidies and tax rebates. Because the Republican party is more sceptical about the climate agenda.

“Also, Republicans with a rhetorical concern about the long term fiscal outlook, know they’re going to do things like extend and make permanent Trump's tax cuts and maybe add corporate tax cuts. They will look at anything to offset the impact and the climate tax subsidies bucket is something a number of Republicans will be looking at.” However he pointed out that a lot of those subsidies are going to Republican states.

Tags: US