what does this mean for markets

Of course, today no one knows for sure which US president’s policies will have the most favorable impact on the economy and markets as a whole. However, taking into account the promises and plans of the candidates for this post, it is possible to make certain predictions and identify potential pain points. And the markets are already actively preparing for this.

Nobody thinks about the national debt

One of the growing problems in the United States and the world as a whole is government debt, which, according to the IMF, will total a record $100 trillion this year. The USA will account for about 35% of this amount.

And it doesn’t appear that Donald Trump or Kamala Harris are trying to address this problem in any way in their economic programs – neither of them is proposing significant reductions in the country’s budget deficit. At the same time, both candidates, of course, plan to maintain and increase the growth of the country’s economy. But the question arises: where will the money for this come from?

If Harris at least verbally promises to compensate for any new spending and programs through increased taxes or other revenues, Trump plans to do the opposite. He wants to extend his 2017 tax cut law, which expires after 2025, while further reducing corporate tax rates. He also proposed eliminating taxes on tips, overtime pay and Social Security retiree benefits.

Today, no one has any doubt that the state budget deficit and increase in public debt are the basic scenario in the case of both candidates. The only difference is in the numbers.

Given these forecasts, markets, which have increasingly tilted towards a Trump victory over the past month, are already rebalancing. In particular, the yield on 10-year US government bonds jumped by almost 70 basis points in a month and a half, and this despite the Fed cutting rates by 50 basis points in September.

The dollar also strengthened against other currencies. Firstly, more positive data from the labor market and general indicators of the US economy give reason to believe that the Fed will not rush to further reduce the rate, but inflation expectations, which are promised by the economic plans of both candidates, do not allow the dollar to decline. And this conflicts with the wishes of Trump, who advocates a cheaper dollar.

Doesn’t the stock market care?

At the same time, the stock market continues to grow and break new records. This can be partly explained by the generous plans of both candidates, who do not plan to skimp on government spending.

At the same time, the corporate tax hikes and tax increases on high-income people that Harris’s program includes would have a less positive effect on the stock market than Trump’s promises to cut taxes again.

Moreover, in the case of Trump’s re-election, the effect of his first elections may also play a role. Then the markets were initially wary of his coming to power, but subsequently, during his reign from 2017 until the pandemic, the markets grew decently. It is obvious that this time similar expectations are also present in the market.

However, an increase in the country’s debt may ultimately lead not only to higher borrowing costs, but also to increased inflation, which ultimately may have a negative impact on the stock market, as was the case in 2022.

Moreover, Trump, who is also one of those perceived as an outsider, is taking a favorable position for cryptocurrencies, which is driving up the value of this asset.

If inflation rises, an increase in interest rates may have a negative impact on economic growth, and therefore investment assets. But the behavior of Trump, who again plans to extend his attention to the Fed, which now controls rates, will also play an important role in this case. In his first term, Trump failed to take control of the Fed, but he does not abandon these intentions even now.

Economic plans are not inspiring

Trump’s old policies, embodied in his famous campaign slogan “America first,” may also end up weighing on the stock market. This primarily concerns import tariffs, which can rise to 20% on all goods and up to 60% on goods from China.

In turn, economists at Morgan Stanley expect Trump’s plan to introduce tariffs will reduce US real GDP growth by 1.4% while at the same time leading to a 0.9% rise in consumer prices.

Obviously, such forecasts, if realized, can support the growth of individual sectors and industries, but in general, a slowdown in economic growth has never been a good sign for markets.

On the other hand, Harris’ economic plan has already been dubbed socialist, as she promises to solve the problem of the high cost of living by stimulating housing construction, stopping price gouging and expanding tax breaks for families with small children.

For example, analysts at the investment bank Goldman Sachs estimate that raising the corporate tax rate from 21% to 28%, as Harris proposes, would reduce profits of companies included in the S&P 500 index by about 5%. According to them, every 1 percentage point change in the tax rate will lead to a 1% change in the earnings per share (EPS) of S&P 500 companies.

While it is difficult to assess the overall impact of Harris’s plans on business, markets have always favored a capitalist rather than a socialist approach to the economy.

In general, economists today argue about whose economic plan among the candidates is bad and whose is very bad. And this is an important negative signal for everyone.

Great Uncertainty

But plans are plans, and today no one can say for sure how it will be in reality. And yet, the plans and promises of the future president, to one degree or another, will still set certain trends in the economy and, accordingly, in the markets. This will especially play an important role immediately after the elections, when the first reaction of the market will be formed based precisely on expectations of actions, and not on the actual deeds of the new president. This suggests that the stock market will probably initially be happier about Trump’s re-election, while the bond market will breathe a greater sigh of relief if Harris is president.

But it can be assumed that in the longer term, more volatility can be expected from the Trump presidency, which was also characteristic of the markets during the first period of his rule. That is, this presidential candidate will likely be more interesting to traders for whom market movement is an important component of success.

We should not forget that this will be Trump’s last presidential term, unless, of course, he changes the constitution. This means that, unlike Harris, he can act without regard to the future. Radical and risky statements and decisions were typical for Trump in his first term, but a new re-election could become even more dramatic.