While elections rarely have any lasting impact on portfolios over the long term, investors are paying close attention to the race for the White House.
With the polls suggesting Donald Trump and Kamala Harris are virtually neck-and-neck, observers are preparing for two quite different outcomes. The prospect of a second Trump administration in particular has concentrated the minds of investors, given the potentially wide-ranging political, economic and social implications.
But what do investors really need to think about when it comes to the US and their portfolios?
Why the US matters
There’s a good reason why economists have long suggested that ‘when America sneezes, the world catches a cold’, even if the emergence of China and India as global economic powerhouses has provided a degree of inoculation.
US economic growth may trail behind that of India and China, but it remains the world’s biggest economy (for now). US companies still dominate global indices, accounting for around 60% of the FTSE All-World index, with tech companies such as Microsoft, Alphabet (owner of Google), Apple and Amazon the major force in global markets.
And the impact of US policies on the global economy has been demonstrated by the ongoing trade war with China. The International Monetary Foundation suggests the effect of restrictions in the tech sector alone could lead to GDP losses for some countries of around 5%.
What about the election?
With Trump having occupied the White House previously and Harris the Vice President under Biden, we have an idea to some extent of what to expect whoever wins.
If Trump wins, much depends on whether the Republicans can carry both the Senate, as that would give him the power to implement his policies. The signature economic policies of his first term – trade tariffs, tax cuts and lighter touch regulation – would likely feature heavily. Trump has already flagged up a desire for higher tariffs on China and other countries, as well as an intention to “enact aggressive new restrictions on Chinese ownership” of a range of assets in the US and introduce a blanket ban on certain Chinese-made imports.
The 2018-19 trade war between the US and China impacted some $450 billion in annual trade, according to the World Bank. The prospect of even bigger trade tariffs could have knock-on effects for inflation and Moody’s Analytics has warned that Trump policies would slow US growth and see the US enter recession in mid-2025.
The Biden White House retained the trade tariffs that the Trump administration imposed on Chinese imports, despite increased efforts to improve diplomatic relations. And with a Harris administration expected to keep them in place it’s unlikely that there would be a shift away from the broad protectionism that has characterised US trade policy in recent years.
One clear difference is in tax policy. While Trump wants to slash the corporate income tax rate (possibly to as low as 15% from the current 21%), Harris has suggested she would increase it to 28%.
But it’s the nature of the victory that could be most significant. For example, Trump wants to repeal the Biden government’s flagship Inflation Reduction Act. With the act driving up investment in sectors including clean energy and infrastructure, any reversal would have clear investment implications. This is much less likely to happen under a divided House and Senate, due to support among some Republicans.
What does it all mean for investors?
Even if you can correctly predict the election outcome, markets won’t necessarily react in the way you expect. There were fears of a market meltdown when Trump was first elected in 2016. In the event, however, the three main US indices – the Dow Jones, S&P 500 and Nasdaq – all hit new record highs, while the US dollar reached a 14-year high within a fortnight of the election.
Investors that jumped out in anticipation of a sell-off missed out on big gains. The same applies this time: making investment decisions based on what you think markets might do is a high-risk strategy. Investors may be anxious about the political and economic ramifications of Trump returning to power. In reality, however, factors such as inflation and deeper economic trends are of greater importance.
Long-term investors need to tune out the noise and remember that even if there’s turbulence in the short-term, it will be smoothed out over time. Knee-jerk investment decisions driven by emotional responses to events should be avoided.
But times of change offer a good chance to review your portfolios anyway, to ensure that it’s diversified and still in line with your risk appetite and objectives.
