On May 9th, I spent the day attending an investment conference in Washington D.C. I very much enjoy going to these types of events but it can get expensive so I try to limit them to two or three a year. I definitely got my money’s worth from this one. It was a fascinating discussion on the US election this fall and how the different scenarios could impact markets. The speakers included a Washington lobbyist, a former senior advisor in the White House Office of Management and Budget, a former special assistant to President Bill Clinton and former ambassador to Germany. I’m anxious to share what I’ve learned with you so bear with me if this update is a bit longer than usual!
So…who is going to win?
All the presenters were of the same opinion: this is a coin toss election. Period. There has not been a US Presidential election in recent memory this close and with so many potential factors affecting the outcome. For example, the age of both candidates introduces the real possibility of a health issue derailing one of the campaigns. This election appears to come down to four swing states: Georgia, Arizona, Wisconsin and Nevada. Biden won all four of these states in 2020 while Trump won Arizona, Wisconsin and Georgia in 2016. If this holds true, the next President of the United States could be elected with a margin of less than 150,000 votes. That is as close as it gets!
There were comments made that implied that if the Supreme Court had not overturned Roe v Wade, Democrats would not have done as well during the 2022 mid-terms. This gave Biden encouragement to run again even if his age is catching up with him. Some are of the opinion that if another candidate were running, Trump would not be doing as well in the polls. As for Trumps’ legal troubles, it is quite clear that this has helped his popularity, not hurt it. As it stands, you now have the two oldest candidates ever to run for President and for the first time, each with one term as President so you pretty know what you’re going to get whoever wins.
Does it matter who wins?
Yes and no and maybe. How’s that for dodging the question? Let’s break this down and try to look at the various scenarios that may play out here. First and foremost, it is less about who the President is and more about who will be surrounding him. Yes, that applies to Trump, as well. If Biden wins, he will likely have a whole new staff in his second term. If Trump wins, it will look very different in the sense that not only will he have a whole new team, they will be prepared to hit the ground running. You might recall in 2016, Trump spent months making staff appointments because they were not expecting to win. In fact, his election staff had all planned vacations for just after the election in 2016! This time, they will be prepared and whatever they have planned will happen much quicker.
If Biden wins, there may be a focus on fiscal restraint due to the ballooning debt which is over $34 trillion right now. The size of the debt is putting certain programs such as social security in jeopardy. There will also likely be a push for higher taxes and tariffs on goods coming from outside the US. Of course, tariffs would not be good for Canada but it would appears that both candidates will be pushing for them.
If Trump wins, expect a push for deregulation, maintaining the 2017 tax cuts, oil and gas production, tariffs on Chinese goods and probably a great deal of government spending. Border protection will once again be a focus for a Trump second term. I would fully expect Trump to also look to replace Jay Powell as the Federal reserve Chairman in favor of someone who will be more aggressive in lowering interest rates.
Believe it or not, what would probably be best for the market is a divided government. That is, a Senate that goes either Democrat or Republican and the House of Representatives doing the opposite. In the United States, you need majority votes in both the Senate and the House before the president can sign them into law. The theory is that a divided government would do the “least amount of damage” because nothing big would get done. I know that sounds crazy but that is how it works. So, for example, if Biden wins and there is a Democratic Senate and House, he will be able to do pretty much what he wants for the next two years. Same thing for a Trump presidency and Republican sweep.
You might be wondering whether Trump or Biden would be better for Canada. The comments I heard were that neither will be great for us because of potential tariffs and the focus on bringing back manufacturing jobs to the US that both candidates desperately want.
But this is a 2025 story, not a 2024 story.
While the Presidential election this year is likely to be consequential, the real story here is that the Trump tax cuts of 2017 expire in 2025. Next year will be all about tax reform and that’s where it matters who wins if there is a sweep either way. Democrats will likely push for tax hikes and Republicans will likely push the other way. It will be roughly a $4 trillion bill and is likely to be consequential. How consequential is anyone’s guess but that will be the focus between now and the end of 2025.
How should we position ourselves?
With what is expected to be a year filled with headlines and surprises, it is tempting to “do something” to prepare for different outcomes. I understand that temptation but I design portfolios for 3, 5 and 10 year time horizons. In my experience, it is usually best to keep portfolio decisions to a minimum. The more short term decisions you make, the greater the chance that you will make a mistake. There are just too many confounding factors that could influence the election outcome and even if you knew who was going to win, there is no way to know in advance how the market will react. What I know for sure is that on average, the market goes up and that is the most important factor to consider.
As always, reach out to me if you have any questions.