Key Market Themes During Election Periods

With additional content provided by John Lohse, Sr. Analyst, Research.

We recognize the presidential election is still a way off, but it’s not too early to draw some policy contrasts between the candidates. Though a sitting and former President facing off limits the amount of potential policy uncertainty investors must consider, there is no doubt the two candidates offer two distinct policy approaches in several key areas.

Here are some of the more divergent potential, economic and market positions to think about.

Trade‍‍

De-globalization is happening no matter who occupies the White House in 2025, but it could happen faster under Trump. More tariffs mean more supply chain disruption, which could be inflationary as it forces movement in production. From an investment perspective, that means markets in China and Mexico may perform relatively better under a second Biden term rather than the Trump Administration. U.S. multinationals may face increased challenges doing business overseas under a Trump Administration. That means more domestic-focused U.S. companies could benefit, such as small caps, real estate, or even regional banks.

Geopolitics ‍‍

China bashing has bipartisan support, but beyond China, Trump may give Israel more space to finish off its war against Hamas, though we hesitate to predict a calmer Middle East given history. Trump will likely create some angst for Europe and Japan by being tough on trade, so those markets could fare better under President Biden.

Immigration‍‍

Trump’s tough border policies may restrict the pace of immigrant entry into the labor force, which could be inflationary. Labor shortages could impair growth some, though the impact would likely be limited based on probable scenarios for the border, immigration, and deportation of undocumented immigrants.

Taxes‍‍

The Trump tax cuts expire in 2025 and will be a big campaign issue this fall. Although election odds are tight based on the latest numbers from the betting markets, it is possible that some of the stock market’s strength reflects some pricing-in of tax cut extensions. The tax “cliff” is massive at $3 trillion, which underscores the importance of the issue.

In terms of market performance, companies paying the highest tax rates may get a boost under Trump. Consumer spending may also get a boost under Trump, who is likely to advocate for lower tax rates all the way up and down the income spectrum (though those cuts will be very difficult to pay for).

President Biden seeks to preserve cuts for those earning $400 thousand in annual income and below, making the cuts easier to pay for. If Trump wins in November, it is possible for him to try to use tariffs to pay for as much in tax cuts as possible.

Among the taxes set to increase: Individual rates, pass-through rates, health insurance surcharges, global minimum tax, inflation reduction act taxes, and housing taxes. Taxing gains on cryptocurrencies is also on the table.

Deficit Spending‍‍

The debt ceiling needs to be raised in mid-2025, creating a catalyst for the U.S. debt and deficit. Markets seem to think Trump cares less about the deficit and may put more upward pressure on interest rates than Biden does. Trump’s focus on bringing as much manufacturing back to the U.S. as possible, coupled with the potential for larger deficits, suggests higher interest rates (and some jawboning of the Fed) under Trump and possibly more inflation over time.

Regulatory Policy‍‍

Less regulation, a hallmark of Trump’s policies, means that financial services and energy – particularly liquid natural gas (LNG) exports – are likely winners under Trump. Light-touch regulation under Trump could also help the buildout of artificial intelligence (AI), at least incrementally. Getting drug costs down has bipartisan support, so we do not expect much policy contrast from the candidates during the campaign.

The Stock Market as a Predictor‍‍

It’s interesting every four years to analyze the relationship between the stock market and the election. We’ll save the evaluation of “Trump stocks” vs. “Biden stocks” for another day, but here we focus on the widely followed three-month indicator. Simply put, over many decades, stock performance from August through October during presidential election years has been shown to be well correlated with election outcomes. Specifically, this indicator has accurately predicted the last 10 presidential winners and 12 of the past 13.

Much more to come from LPL Research on the election as November approaches, but there are some interesting nuggets to whet your appetite. We won’t make any predictions, nor will we make any investment recommendations based on either candidate’s prospects. However, we will point out that the communication services sector, with its heavy traditional and digital media components, looks like a winner right now regardless of who wins in November.

Stock Market Performance Preceding Presidential Election Has Been Predictive of Election Outcomes

Source: LPL Research, Bloomberg 05/21/24
Disclosures: All indexes are unmanaged and cannot be invested in directly. Past performance is no guarantee of future results. The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

Much more to come from LPL Research on the election as November approaches, but there are some interesting nuggets to whet your appetite. We won’t make any predictions, nor will we make any investment recommendations based on either candidate’s prospects. However, we will point out that the communication services sector, with its heavy traditional and digital media components, looks like a winner right now regardless of who wins in November.