Key takeaways
President Joe Biden’s unexpected departure from the race set up a showdown between Democratic Vice President Kamala Harris and Republican former President Donald Trump.
The shakeup in the contest for the White House appears to have tightened the race in several key battleground states.
While investors take an interest in the election, it helps to maintain a proper perspective regarding any potential impact on capital markets.
With less than two months until 2024’s general election, the Presidential race appears as heated as ever. The daily news features campaign coverage of Democratic nominee, Vice President Kamala Harris, and Republican nominee, former President Donald Trump. Polls show a very close race, particularly in so-called “battleground states” where neither side appears to have a significant edge. These states are critical as the Presidential race is determined by the electoral college votes of each state rather than a nationwide popular vote. Heated campaign rhetoric is expected over the coming weeks as the two candidates try to attract undecided voters.
The election landscape changed in July when President Joe Biden opted not to seek a second term. “This is no longer an election that is directly a referendum on an incumbent,” says Rob Haworth, senior investment strategy director for U.S. Bank Wealth Management. “Market uncertainty often centers around whether an incumbent will lose, but come January 2025, we know there’s going to be a change of President one way or the other.”
From an investment perspective, there are no clear guidelines as to what any specific outcome might mean. “The market today is more focused on corporate earnings and the potential for Fed interest rate cuts,” says Haworth. However, with election season heating up, the outcome’s potential impact might draw greater investor focus.
While the presidential contest’s dimensions have changed, what’s not clear is what the implications could be down the ballot, particularly with House and Senate races that will determine Congressional control.
Along with the headline Presidential race, one-third of the seats in the U.S. Senate (currently under narrow Democratic control) and all 435 seats in the U.S. House of Representatives (currently under narrow Republican control) are also on the ballot this fall. Here, too, a small margin may determine control beginning in 2025, with winners in many closely contested seats difficult to predict. It is conceivable that the election outcome could result in one-party control of both houses of Congress and the Presidency, or a split between the two parties, as exists today.
“A key consideration for investors would be the policy direction of the winning candidate,” says Haworth. “The biggest policy advancements occur when one party controls the White House and both houses of Congress. Based on polls, we’re a long way from that scenario at this point.”
As the November election nears, investors are likely to be more attuned to the potential ramifications of the election’s outcome for businesses, the economy and capital markets. “We need some clarity around key issues to be able to identify potential market winners and losers based on who wins the election,” says Haworth. Candidates will likely draw more definitive policy distinctions as the campaign becomes more focused. But Haworth notes that differences are likely to be more evident at an industry level. “There will be sector differences in policies,” says Haworth, “but we’re not seeing policy proposals that would specifically alter the overall economic trajectory.”
Tax policy is one issue beginning to take shape. The most visible discussion centers on what happens to provisions of the Tax Cut & Jobs Act (TCJA), most of which are set to expire at the end of 2025. When passed in 2017, the package represented the most prominent domestic policy initiative of the Trump administration. If the provisions are extended, keeping tax rates lower, as former President Trump proposes, it creates new federal budget deficit concerns from the resulting tax collection reduction. To this point, the Trump campaign hasn’t specified how to address deficit concerns, although it has raised the possibility of additional tariffs on imported goods as a method of boosting revenue (more on tariffs below).1
If some or all provisions of the TCJA aren’t extended, tax rates could be higher for up to 60% of tax filers. Other expiring provisions would impact the standard deduction, child tax credits, and estate and gift tax exemption amounts and tax rates. For corporations, an expiration of TCJA would result in the top corporate tax rate moving from 21% back to 35%.
Vice President Harris has offered proposals for expanded child tax credits and credits for first-time homebuyers.2 Additionally, Harris has proposed a 28% tax on long-term capital gains for households earning $1 million or more, lower than the 39.6% rate that President Joe Biden laid out in his 2025 fiscal year budget. She also announced a proposal recently to provide small businesses a $50,000 tax deduction for startup expenses, representing a tenfold increase from today’s $5,000 deduction.5 In the meantime, Trump recently proposed cutting the corporate tax rate to 21% to 15% for companies that make their products in the United States.3 Both Trump and Harris have also stated support for eliminating taxes on tips for service and hospitality workers.4
Much more discussion and definition around potential tax policy is likely as the election nears. “It’s still too early for investors to game out exactly how tax issues will unfold over the election season,” says Haworth.
Tariffs, particularly those placed on Chinese goods, have emerged as another issue. During his term as President, Trump implemented tariffs, and President Biden continued most of them and recently added more tariffs, reflecting a move away from previous free trade policies. Trump has discussed the possibility that, if elected, he would consider implementing more significant tariffs. Either candidate as President is likely to pursue fiscal stimulus policies to boost the economy, although likely with different combinations of tax incentives and higher spending.
Haworth says party control may have more impact at the sector level. “For example, if Republicans win, there is likely to be more of a push for development of fossil fuels, while a Democratic win might further promote renewable energy development.” Yet Haworth says such policy tendencies don’t always translate into investment outcomes. “Ironically, businesses tied to renewable energy saw their stocks perform better under the Trump administration, while stocks of oil companies and other traditional energy companies have performed better under the Biden administration,” notes Haworth.
An old saying goes that “elections have consequences.” But how do those results influence capital markets? And what are the potential ramifications for you as an investor? To better address this question, U.S. Bank investment strategists studied market data from the past 75 years and identified patterns that repeated themselves during election cycles.
The analysis points to minimal impact on financial market performance in the medium to long term based on potential election outcomes. The data also shows that market returns are typically more dependent on economic and inflation trends rather than election results.
What may be more important to investors is what the parties represent. “Party platforms, which are hammered out at national conventions, often tell the markets more important information than the name of the winner or loser of the general election,” says Haworth. “Investors will try to determine which party is likely to be in power, and how that will benefit particular industry sectors of the market.”
How have election outcomes affected market performance in the past and how might potential scenarios play out in the 2024 presidential election?
U.S. Bank investment strategists reviewed market data going back to 1948. Using average 3-month returns following each election outcome—and comparing those with the average 3-month return during the full analysis history—strategists calculated the statistical significance of the relationship between political control and market performance using a calculation called a t-statistic, or t-test.
A t-test determines whether one group of variables (in this case, the political composition of the White House and Congress) has a measurable effect on another variable (in this case, average three-month S&P 500* returns during the control period).
The analysis also looked at the exact periods of time when parties took control of different branches of government (rather than starting from election dates themselves), although this analysis resulted in similar outputs and conclusions.
Results of the analysis contradict conventional wisdom that a Republican or Democratic “sweep” of the presidency and Congress is most likely to cause market disruption. In fact, historically there has not been a statistically significant relationship between single-party control of both the White House and Congress and market performance.
Rather, the data uncovered three divided-government outcomes with a statistically significant relationship to market performance.
Two scenarios corresponded to positive absolute returns in excess of long-term average returns:
One scenario corresponded to positive absolute returns modestly below long-term average:
While investors may closely monitor election results for their potential effect on stock market performance, it’s important to recognize that other factors that may have greater impact on their portfolios. The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
The historical data suggests that economic and inflation trends, more so than election outcomes, tend to have a stronger, more consistent relationship with market returns.
In general, rising economic growth and falling inflation have been associated with returns that are considered above long-term averages, while falling growth and rising inflation have corresponded to positive but below average market returns. For investors, staying focused on these patterns is probably more insightful than potential election outcomes when it comes to forecasting market performance.
When looking at midterm election data (elections held in between presidential elections), U.S. Bank investment strategists found that the S&P 500 consistently outperformed in the year after midterms compared with non-midterm years. Just like presidential elections, which party controls Congress generally was not a factor in projecting overall equity market performance.
These equity and bond market trends were consistent over time unless there was a dramatic disruption. Read more about how midterm elections affect the stock market.
While the analysis doesn’t point to elections having a meaningful medium-to-long-term market impact, they could affect individual sectors and industries. Different election outcomes have the potential to affect proposed policies, regulations, or global conflicts.
The following are policy issues to monitor throughout the presidential nomination and election process:
In any election, there’s also the potential for delays in verifying an election victor, particularly in closely contested races. At the presidential level, this occurred in both the 2000 election (settled with a Supreme Court verdict) and 2020 election (when the result was challenged by one candidate). In these instances, ensuing delays could lead to more uncertain election outcomes, in which case riskier asset classes might decline until clarity emerges.
Harris and Trump are now officially the major party Presidential nominees. The composition and control of Congress resulting from the 2024 election is still up in the air but is another aspect of this year’s election cycle that bears consideration. It also makes sense to keep an eye on which sectors are most likely to be affected by the potential for key policy changes. Despite the constant headlines revolving around elections, investors are well served to focus most on factors such as economic growth, interest rates, inflation and corporate earnings when making portfolio decisions.
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*The Standard & Poor’s 500 (S&P 500) is a well-known, broad capitalization weighted index of U.S. stocks. The index has one of the longest histories amongst U.S. indexes.
Historically, there does not seem to be a clear connection between the outcome of a Presidential election and capital market performance in the medium- to long-term. Two scenarios corresponded to positive absolute returns in excess of long-term average returns – Democratic control of the White House and full Republican control of Congress; or Democratic control of the White House and split control of the Senate and House. One scenario corresponded to positive absolute returns modestly below long-term averages – Republican control of the White House and full Democratic control of Congress.
There doesn’t seem to be a direct link between the occurrence of an election year and market outcomes. The stock market, as measured by the S&P 500, was down in three of the 16 presidential election years since 1960. It experienced negative returns in seven of the 16 non-presidential election years. Typically, other factors such as the state of the economy, interest rates, inflation and corporate profits have a greater bearing on broad stock market performance.
It’s important for investors to avoid anticipating election outcomes, the potential impact of those projected outcomes, or actual election results. Investors should discuss their current portfolio positioning with their financial professional, and determine, by assessing all factors, including changes in personal circumstances and economic and market developments, whether any changes are appropriate.
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