• Renewed uncertainty surrounding the US presidential election has contributed to a spike in market volatility. This has given us an opportunity to benefit from moves we made earlier this year.

• Trump’s low tax, pro-business agenda is likely to lead to greater growth but may increase longer-term economic risks. Harris’ platform is still developing but is mostly seen as a continuation of that of Biden.

• It’s worth remembering that good companies will find a way to do well regardless of who is in office.

 

Discipline pays off in times of turbulence

Earlier this year we discussed the possibility of increased market volatility leading up to the US presidential election. It has arrived. Major US indexes were down around 5% (S&P 500) to 10% (Nasdaq) from recent highs in July before rebounding at the end of the month and then experiencing more turbulence as economic and reporting data disappointed. The drawdown has been concentrated in the leaders of the preceding rally, specifically mega-cap technology names (Nvidia, Meta, etc.). Although times like these are always unpleasant for investors, it’s worth keeping two things in mind: (1) volatility is always temporary and (2) it creates opportunities for long-term investors.

We have already begun taking advantage of the downturn for our clients. Recall from our earlier newsletters that we rebalanced portfolios in both March and June, trimming our exposure to stocks that had outstanding performance (exactly the ones that are down now) and allocating to cash and other areas of the market that had not yet participated in the upswing. It is times like these that underscore the value of a disciplined investment process. We are now able to re-allocate to companies on our shopping list that are “on sale” and that we believe have more room to run.

US election uncertainty  

The big question clients are asking is how long we think this bout of volatility can last. The answer relates to one of the key sources of the turbulence, which we believe is linked to increased uncertainty of who will win the US presidential election. That said, it would not surprise us if the market continued to be choppy (i.e. greater swings both up and down) until the election is concluded.

The evolution of betting markets in the figure below can help illustrate what’s going on here. After the first US Presidential debate, Trump’s likelihood of winning grew steadily and peaked at 66% in the days after his attempted assassination. Those odds have fallen significantly since Biden dropped out, with the momentum swinging to Harris. We believe this jolted the market into a realization that the election is still very much up for grabs. This clouds the policy landscape moving forward and gave the market a reason to pull back.

What are the potential market implications of Trump vs. Harris?

With the above in mind, we thought it would be helpful to summarize both candidates’ policy agendas and provide our take on what their respective implications could be for markets. Trump’s platform is a mix of traditional pro-business policies mixed with greater protectionism. He has called for lower corporate taxes, likely coming through an expansion of the cuts he put in place during his last presidency. He has also called for less regulation, most notably in artificial intelligence, cryptocurrency, and the environment. He is intent on supporting domestic industrial activity and is keen on using tariffs and other barriers to do so. He advocates for stricter immigration as well as higher defense spending.

When it comes to markets, we view small and mid-sized companies as well as those in cyclical sectors (like financials and industrials) as benefiting most from a Trump-led policy environment. We also see potential tailwinds for technology, partly because of the decreased AI regulation but also because less immigration may speed up the need for automation. The positives here are partly offset by the fact that much of Trump’s platform is inflationary and will likely worsen the national debt picture, both of which increase economy-wide risks over the long run.

There is relatively less clarity on Harris’ agenda because she is so new to the race and, as Vice President, did not take many strong positions that differed from those of Biden. As of now, our research leads us to believe she run on a campaign that is essentially the same as Biden’s with some nuances. To this point, she is likely to call for an increase in corporate taxes, from 21% to 28%. She will look to build on Biden’s infrastructure and clean energy initiatives. We also anticipate her calling for increased regulation in artificial intelligence, industrial production, and the environment. Finally, we believe she will support normalized relationships with US allies while pushing China for more fairness in trade practices.

We see Harris’ agenda as leading to lower but more stable economic growth than that of Trump. We therefore see stocks benefiting from secular growth trends (i.e. those in industries that are growing regardless of the economic environment, like big tech) as outperforming under Harris. We see green industrials doing the same.

Our focus

We are sensitive to the fact that politics are divisive and often get mixed with emotions and personal preferences. This can cause investors to over-emphasize the importance of who is in office. It’s important to remember that the US system is designed with checks and balances that limit the individual power of all branches of government, including the Presidency. This is perhaps why median market performance under Republican and Democratic presidents has been comparatively close – within about 1%. What matters most in the long run is the quality of the underlying businesses into which one is investing; good companies will find a way to do well no matter who is in office. That is why we spend relatively little time worrying about who will win the next election and focus instead on finding good companies.