2024 US elections and potential investment implications

• US equities historically tend to be relatively stronger with a Republican Presidential win – they are seen as more pro-growth.
• Beyond who takes the White House, fundamentals are still critical in driving the longer-term direction of US markets.
• Factors like productivity, labour costs, corporate profits, US household strength, and the fiscal position, will have a strong bearing on markets.
• Our view is that both parties are keen on keeping the fiscal deficit restraint, not wanting it to ‘blow-out’ for fear of a high debt burden.
• A healthy fiscal position should keep US yields contained, supporting US equity valuations.
• Should Trump assume office for a 2nd term with a split Congress (Republicans hold the House and Democrats the Senate), this is expected to be neutral to positive for financial regulation, and negative for global relations and environmental policies. It is expected to be neutral for fiscal and monetary policy, infrastructure spending, and tax policies – these tend to be more influenced by underlying economic considerations.

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Fundamentals can still trump politics

Historically the performance of US equities, in an election year, has been relatively stronger under a Republican presidential victory largely because they have a reputation for policies that are more pro-corporate than Democrats (see Figure 1). Such perceptions are reflected in their policy initiatives, where most recently, for example, The Limit, Save, Grow Act (April 2023) was the Republican’s proposal to raise the public debt ceiling (to give more headroom for infrastructure investment and lower taxes) and cut government consumption spending.

President Trump aligns with such views, being perceived as pro-business and employment, but US equities actually performed stronger in President Biden’s election year (see Figure 1). Trump’s election year (2016) broadly coincided with a favourable year for equity investors chasing value-stocks, while Biden’s election year (2020) was driven mostly by growth-stocks. Outperforming sectors in both election years were firms across communication services, IT, and materials¹.

Regardless of which party governs, US macro fundamentals are always important in driving equity returns. After the Q1 2020 COVID slump and Q3 2020 rebound to trend, US equities were supported by strong corporate and household fundamentals i.e. improving productivity growth, low real unit labour costs, above average profits to GDP, very high household wealth, and robust consumption spending².

These fundamentals are likely to remain important to the performance of US risk assets over the next few years irrespective of the 2024 election outcome. The consensus view is that US fiscal policy will remain generally neutral, adjusting toward countercyclical, for the economy. Any new significant stimulus plans will be constrained by budget and debt concerns.

Figure 1: S&P 500 returns in past election years

Source: FactSet, Jefferies January 2024

US fiscal stimulus reacts to the business cycle, while equities perform best under fiscal restraint

Figure 2 shows that, not surprisingly, US fiscal policy moves with the business cycle. Historically, when growth shocks on the downside there tends to be more stimulus. On average nominal GDP growth is at its trend and fiscal policy is neutral i.e. a zero fiscal impulse (see Figure 2). The neutrality of the fiscal impulse on average suggests that there is no bias across Democrat or Republican for sustained stimulus spending.

Figure 2: US fiscal stimulus, GDP growth, and S&P500 returns

Source: LSEG Datastream, January 2024

One period that stands-out in Figure 2 with strong equity market returns (above average) was 1995-2000, which correlated with a period of significant US fiscal policy restraint (i.e. the fiscal impulse was restrictive above neutral³). This fits with the argument that well-controlled government spending avoids ‘crowding-out’ private sector investment, and as a result, equities can potentially perform better than otherwise.

If the US fiscal deficit does not deteriorate any further, then yields can potentially hold around trend growth, without upward pressure on the risk premium

At the current juncture, regardless of which party governs the US, significant pressure will persist for the fiscal deficit to be contained and slowly improve over time (while increases in public debt are minimised). We already observe US politicians reacting to these pressures as President Biden is managing the unwind of strong fiscal stimulus back toward neutral (see Figure 2).

The latest annual long-term fiscal projections from the Congressional Budget Office (CBO, June 2023) suggest that if US real growth can average close to its trend (at 1.7% p.a. out until 2033) then the US fiscal deficit may be no worse than 6.4% of GDP and public debt to GDP can correct to 115% (see Figure 3). The CBO reports that if such fiscal outcomes can be achieved then the US 10y nominal yield can average around 4% p.a. over 2024 to 2033.

Figure 3: The US fiscal situation and potential outcomes to 2033

Source: LSEG Datastream, January 2024

This implies that if US politicians can make sure the deficit is no worse than currently then there is a good chance of public debt stabilising. At the same time they can avoid placing undue upward pressure on the yield risk premium. As a result, US real yields may fluctuate around trend growth (as we are seeing evidence of already, see Figure 4) and the nominal 10y yield can potentially hold around 4% (i.e. the average 10y real yield plus the Fed’s 2% inflation target).

Figure 4: US real yields may average around trend growth

Source: LSEG Datastream, January 2024

The big fiscal challenge for the US comes after the end of this decade

The big fiscal challenges that the US faces, for long-term fiscal sustainability, will hit after 2030. If current policy settings do not change dramatically then US public debt can become explosive: surging toward 180% of GDP by 2053 (see CBO June 2023). This will be a significant problem, dictating substantial fiscal reforms toward higher taxes and less spending, for whoever governs the US toward the end of this decade.

Summary of macro themes and possible implications from US election outcomes

Current situation:
Democrat President (Joe Biden),
Republican House of Representatives (6 seat majority), Democrat-controlled Senate⁴

Scenario considered (hypothetical situation of a Trump victory):
Republican President (Donald Trump, second-term),
Republican House of Representatives, Democrat Senate

Impact	Macro Themes	Possible implications from US election outcomes
Neutral	Market Volatility	Key US volatility metrics normalised at the start of 2024 i.e. equity market volatility (VIX) is below average, interest rate volatility (MOVE) is marginally above average5. Market volatility tends to be more sensitive to policy uncertainty (especially surrounding debt ceiling debates and government shut-down risks) than whether the US elects a Republican or Democrat president. Cyclical volatility may rise if the Congress remains split after the November 2024 elections. However, any such volatility should normalise in time as clarity on the direction of policy unfolds.
Neutral	Sector-specific effects / Tactical Positioning	A Trump victory could have a more positive impact on investor sentiment because he is perceived as more pro-business and anti-tax. However, in Biden’s election year (2020) US equities actually outperformed the returns in Trump’s election year (2016). Beyond fiscal policy actions, the macro fundamentals of US corporates and households are very important in driving equity market performance. As US fundamentals are likely to remain positive, markets should sustain their underlying trends regardless of the election outcome.
Neutral to Positive	Financial Regulatory Environment	Driven by the collapse of Silicon Valley Bank (SVB) in 2023, the Democrats are currently arguing (across Senate Committee6) that the banking sector’s capital coverage needs to rise. In contrast, Republicans are generally less supportive of tighter financial sector regulations, which can be more positive than otherwise for investment returns from financial sector equites.
Negative	Global Relations	The trend toward protectionist policies may prove more intense under President Trump, especially with China7. President Trump is also likely to be tight on US immigration. President Trump may be less supportive of US ties with NATO and demand greater funding from Europe to support Ukraine. However, given the huge importance of the Middle-East, demands for US support (to Israel and its allies) may be similar regardless of which party governs.
Neutral	Fiscal and Monetary Policy / Interest Rates	Irrespective of the election outcome, US politicians will still face significant pressure from bond markets to control spending and ensure the fiscal deficit continues to fall over time. Under President Biden the US fiscal impulse has reversed (see Figure 2) and this trend is likely to continue with President Trump.
Neutral	Infrastructure Spending and Onshoring	Because Trump is pro-employment and investment there is unlikely to be any significant changes to Biden’s Infrastructure Investment and Jobs Act (IIJA 2021). The IIJA will spend $1.2tn (over 8 years8) on roads, bridges, rail, cleaner-energy transmission, renewables, and water. In addition, the trend toward greater US manufacturing onshoring is likely to continue, as there is strong bipartisan support for the CHIPS and Science Act (2022). The spending program, $280bn8 (over 5 years), hopes to boost R&D, investment, employment, and productivity growth.
Neutral to Negative	Environmental Policies	Parts of the Inflation Reduction Act (IRA 20229) could be repealed if the newly-elected Republicans come under market-driven pressure to quickly reduce the budget deficit. Changes to the IRA would be straight-forward especially if the Republicans win the Senate, keep the House of Representatives, and win the Presidency (i.e. a ‘clean-sweep’ outcome). For example, elements of the planned fiscal spending (and tax credits) linked to cleaner energy, which is around 80% of the IRA package, could be cut. Trump has shown his support toward US oil production with his ‘Drill, Baby, Drill’ slogans and rhetoric. However, if the Democrats can hold the Senate (with President Trump and a Republican House) a deal is possible where the thrust of the IRA is preserved. This is a feasible outcome because some key Republican states benefit from IRA spending plans (especially across manufacturing and agriculture). In addition, there is bipartisan support for elements in the IRA that try to boost manufacturing efficiencies, cut healthcare costs for households, and increase tax revenues.
Neutral	Taxation Changes	Under the Tax Cuts and Jobs Act (TCJA 2018) the lower personal tax rates are set to expire at the end of 2025 (and revert to 2017 rates). The changes to corporate tax rates, from a 15-39% range to a flat 21%, are permanent. Both Democrats and Republicans have argued that the tax cuts can increase business investment, boost household consumption, and increase GDP growth – ultimately paying for themselves. As a result, the tax cuts are likely to be extended whether Trump or Biden wins in 202410. However, President Trump may push for more (than otherwise) government spending cuts to fund them (in particular, cuts to aspects of the IRA).

 

¹ Source: LSEG Datastream, January 2024.

² For more detail on Fullerton’s assessment of US fundamentals and the outlook for risk assets please see: https://www.fullertonfund.com/wp-content/uploads/2024/01/FIV-Q1-2024_FA_FINAL-C.pdf.

³ The period coincides with Democrat President Bill Clinton, who when he left office in Jan 2001 achieved the highest-approval rating (at 66%) of any US president in the history of the Gallup Poll (since 1937). The second highest ranking was achieved by Roosevelt (65%), while Trump scored 34%.

⁴ Source: https://ballotpedia.org/, as of 31 January 2024. The 435 member US House of Representatives comprises of 219 Republicans, 213 Democrats, and 3 vacancies. The 100 member Senate comprises of 49 Republicans, 48 Democrats, and 3 Independents. The Democrats control the Senate because the three independents tend to support them.

⁵ Source: LSEG Datastream, January 2024.

⁶ Source: ‘Wall Street bank bosses warn lawmakers of economic toll from new rules’, 6 December 2023 Reuters News.

⁷ Further protectionist policies may reinforce the shifts in global trade and investment flows that Fullerton has highlighted. For example, protectionism seems to be creating stronger risk asset performance across countries that produce high value-added outputs, and have favourable ties to the US, or to China’s supply-chain. See https://www.fullertonfund.com/wp-content/uploads/2024/01/FIV-Q1-2024_FA_FINAL-C.pdf for more detailed discussion.

⁸ Source: The White House.

⁹ The IRA (2022) contains $500bn in spending and tax breaks that aims to curb inflation by increasing efficiencies with cleaner energy, lower carbon emissions (over the next 10 years), reduce healthcare costs, and lower the fiscal deficit (in part by improving taxpayer compliance. Source: McKinsey ‘The Inflation Reduction Act’ October 2022).

¹⁰ Treasury Secretary Yellen has said that a second Biden administration would seek to retain the tax cuts for 99% of US income earners (that is the proportion below the $400,000 p.a. income threshold). Source: Bloomberg News, 26 January 2024.