Presidential elections often beget new theories about how candidates might influence financial markets. This year is especially pivotal, with nearly half of the global population participating in elections across their countries. In certain regions, particularly Emerging Markets where political risk is heightened, election results can significantly influence market direction, as we’ve seen this year in countries like Mexico and India. As the focus now shifts to the U.S., while some policies from presidential candidates Harris or Trump may affect certain sectors of the economy, we believe that, over the long term, the resilience and growth of the U.S. economy and markets are largely independent from individual election outcomes.
More influential factors shaping market direction include the phases of the business cycle, the direction of the Federal Reserve’s monetary policy, productivity, and corporate profits. While it is very hard to predict how the election will turn out, or what fiscal policies will flow from the next president, we can count on greater certainty from the Federal Reserve System. The Fed is a key factor in determining the overall growth of the economy regardless of who wins the White House. And the Fed has indicated that it intends to take an accommodative approach to lowering interest rates through the remainder of 2024 and into 2025. The Fed’s policy goals are clear, and we can respond to those policy goals in our portfolio with much less uncertainty than the U.S. Presidential Election.
The charts below illustrate that market performance aligns more closely with U.S. economic growth than presidential party control. While presidential administrations have influenced GDP growth and, consequently, equity markets, neither major political party has proven consistently more effective in stimulating the economy. In our view, the century-long expansion of U.S. equity markets is primarily driven by apolitical factors such as technological advancements and increased access to education, rather than specific partisan policies.
The goal of this article is not to predict which candidate will win or which party will secure a majority in Congress after the election. Rather, we focus on examining the key policy differences between the candidates and assessing how these differences could affect capital markets in the years ahead. We have identified four critical areas where the candidates’ policies diverge and where we anticipate the greatest potential impact on markets.
1. Taxes:
No matter the outcome of the election, tax policy will be a major topic of debate in Washington next year as several provisions of Trump’s 2017 Tax Cuts and Jobs Act are set to expire in 2025. The future of these provisions – whether they are extended, modified, or allowed to lapse – will be a central issue, along with how, if at all, to fund any proposed changes.
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Potential Market implications:
Corporate tax is arguably one of the most critical issues for markets this election. A reduction in taxes under Trump’s plan would likely be favorable for equities but could have adverse effects on Treasury bonds and widen the fiscal deficit. Harris’s proposal to raise corporate taxes could pressure profit margins across market sectors. Additionally, her proposal to tax unrealized capital gains could negatively impact the stock market, real estate and other risk assets.
2. Tariffs:
Tariffs, which are taxes or duties imposed on imported goods, designed to protect domestic industries and influence trade balances, are essential to United States trade policy, with their implementation having a significant impact on international relations as well as both the global and domestic economies. Although both candidates favor imposing tariffs on China, they differ in approach and scope.
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Potential Market implications:
Both candidates aim to reduce U.S. reliance on China, but their approaches differ. Trump's proposed broader tariffs could further disrupt global supply chains and increase consumer prices. Businesses heavily dependent on Chinese imports (particularly those in IT, healthcare, energy, industrial, and consumer staples sectors) might face margin compression and earnings declines. Trump's mercantilist approach and comprehensive tariff proposals could also drive further inflation.
3. Regulations:
A president's regulatory stance can shape every facet of business operations, affecting costs, consumer behavior, innovation, and capital allocation. Regulation is one of the key levers through which a president can influence markets.
| Harris Proposals | Trump Proposals |
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Potential Market implications:
Regulation often promotes stability and investor confidence, particularly in well-established firms. However, it can also increase costs, dampen innovation, and compress corporate profit margins. Conversely, deregulation typically benefits smaller, growth-oriented companies by reducing costs, boosting margins, and spurring innovation. Harris’s proposals on price controls, depending on the industries targeted, could have unclear consequences, potentially affecting profitability and investment decisions. To the extent that Trump takes a more lenient approach toward corporate consolidations, we may see an uptick in dealmaking, potentially accelerating exit activity in private equity and venture capital. In the short term, equity markets often respond positively to deregulation. However, the long-term effects vary depending on the specific rules being changed and broader economic conditions.
4. Immigration:
Immigration has emerged as one of the most contentious issues in this election, with Trump placing it at the core of his campaign. Beyond the social implications, a sharp reduction in unauthorized immigration and tighter restrictions on legal immigration could have substantial effects on parts of the economy.
| Harris Proposals | Trump Proposals |
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Potential Market implication:
Sharp restrictions on immigration as proposed by Trump could meaningfully reduce labor supply, potentially triggering a renewed surge in inflation, particularly in service sectors. A reduction in skilled worker visa programs could also limit the talent pool, particularly impacting industries like IT and healthcare, which tend to rely more heavily on specialized expertise.
The bottom line:
The policies outlined by each candidate could have mixed effects on various sectors of the economy and financial markets. The ultimate outcome will likely depend on which policies are prioritized and, critically, whether budgetary constraints, judicial rulings, or legislative hurdles prevent their full implementation. These factors could significantly limit the broader economic impact of the candidates’ proposed agendas.
At Commonfund, we do not take positions in the portfolio based on political views. Our process is grounded in data, and we, along with our managers, continuously monitor the evolution of macroeconomic trends and market pricing to seize opportunities arising from potential market overreactions. This enables us to capitalize on market dislocations when prices deviate from underlying fundamentals, particularly during politically driven volatility.
As long-term managers of perpetual pools of capital, we focus on generating returns where market and economic risks are adequately compensated. Geopolitical risk, however, is the hardest to price, as it requires both accurate predictions of the event and the market’s response. For this reason, we generally avoid taking positions based on geopolitical events, focusing instead on areas where we can better assess the risk-reward balance.
