How the US election campaign affects the stock market

Political markets have short legs, as every stock market trader knows. And yet these legs sometimes carry the markets in a surprising direction.

This is also the case with the American elections, which are due to take place on November 5. Uncertainty is usually greatest in the early phase of the election campaign, during the primaries, says Ryan Sweet, chief US economist at the consulting firm Oxford Economics. Once the candidates and their proposals are known, uncertainty is reduced.

Higher tariffs under Trump . . .

Things will be a little different in 2024. After President Joe Biden was ousted by his own party, Kamala Harris became the Democratic presidential candidate very late by American standards and had to quickly put together her election program. And it remains very uncertain whether the Republican candidate, former President Donald Trump, will keep the many promises he made during the election campaign. Both candidates have a protectionist and statist streak.

However, the broad outlines are clear. If the Republicans win across the board, this would bring further tax cuts for companies and individuals as well as deregulation of the energy industry. Stock prices would benefit from this.

However, UBS analysts caution that higher tariffs and trade wars under Trump could reduce this positive effect. “A Trump victory would bring higher tariffs, and these fuel inflation,” says Sweet. Other plans by the Republican candidate could also drive up prices. These include further tax cuts and mass deportations of illegal immigrants. The latter would exacerbate the shortage in the labor market.

Some companies that specialize in renewable energy could suffer from the elimination of green subsidies introduced by President Joe Biden, but it is not clear whether Trump will actually eliminate those subsidies.

. . . and tax increases under Harris

If the Democrats were to win the White House and Congress, companies in the USA would have to prepare for higher taxes: Kamala Harris wants to increase the corporate tax rate from 21 to 28 percent. A Democratic government would probably also apply antitrust law more strictly and control takeovers more closely. In this respect, many analysts see a complete triumph of the Democrats as the worst-case scenario for the stock market in the short term.

The banks in particular would not be happy with the strict supervision of a Harris administration. The pharmaceutical industry would expect tougher negotiations on drug prices. However, it is quite possible that the Democrats would be satisfied with a few high-profile victories and would not overturn the entire price structure in the pharmaceutical sector.

However, a Harris administration would be more predictable for the financial market because it wants to continue the policies of the Biden administration in many areas. Harris’ plans are somewhat less inflationary, and the Democrat is likely to keep the budget deficit a little better under control than Trump.

The third scenario

On the betting markets, the Vice President has a slight lead over Trump after her strong performance in the TV debate on Tuesday. Financial stocks that are traded as “Trump Trade” also weakened: Bitcoin lost ground after the debate, as did the shares of Trump’s own social network, Truth Social. The election outcome, however, is on a knife edge; several tens of thousands of votes in seven contested states will decide between Trump and Harris.

The financial market must also keep an eye on the parliamentary elections. Analysts at UBS currently see a 50 percent chance of a divided Congress. This means that the Democrats would win the majority in the House of Representatives and the Republicans in the Senate.

This situation would be uncomfortable for the new president because many of their plans would get stuck in parliament. However, the stock markets tend to be in favor of a divided Congress because it would bring more calm and predictability. Extreme and ill-considered ideas from the White House would be stopped.

Moreover, the president would only be able to govern to a limited extent with his own decrees and bypass Congress because the American Supreme Court has limited the power of government agencies with a series of rulings.

Thinking beyond election day

Investors who want to invest in American companies should therefore also keep an eye on the parameters that shape the economy in the USA in the medium to long term: