A clear outcome to the 2024 election battle between former President Donald Trump and Vice President Kamala Harris will produce sighs of relief on Wall Street and likely jump-start an S&P 500 rally to new heights — in all but a low-odds, high-tax blue sweep.
Yet the honeymoon may not last long, no matter how Trump vs. Harris resolves. Consider the presidential contenders' economic policies. Even if markets manage to dodge the risk of tax hikes and tariffs, the deficit-funded plans of both candidates risk stalling progress on lowering inflation and provoking a bond-market backlash. That could jeopardize continued Federal Reserve rate cuts and pinch stock market valuations.
The bull case under Trump counts on him soft-pedaling or at least slow-walking the tariff and deportation threats that have had top billing in his campaign.
Trump Vs. Harris Economic Policies: S&P 500 Sudden Impact
Harris' proposals to raise taxes on capital gains, stock buybacks and corporate earnings would "make companies more expensive" overnight with a Democratic sweep, Tony Roth, chief investment officer at Wilmington Trust, told Investor's Business Daily.
Roth expects the S&P 500 to rally, however, on a Trump victory, with or without a Republican-controlled Congress.
Initially, "markets will price in a more favorable regulatory and tax environment," he said. "Then, only over time, will markets price in the magnitude and impact of tariffs" as the next shots in Trump's trade war become clear.
A Harris victory along with GOP control of the House, Senate or both would largely preserve the status quo that's delivered a two-year bull market run. That could produce a relief rally, but would lack any additional catalyst to propel the S&P 500.
Election 2024 Risks: Will Trump Carry Out Tariff Threats?
Under Trump, Roth expects a trade war "that's probably uncomfortable for many kinds of industries and companies." But he doubts a Trump administration will follow through on his "more extreme positions" on tariffs and immigration, because they "would cause significant dislocation in the economy and almost certainly a recession."
When the first phase of his trade war launched in 2018, Trump slapped tariffs on $300 billion worth of imports from China. That's only about 10% of total U.S. goods imports, according to Moody's Analytics. Now he's touting a 20% tariff on all $3.5 trillion of imports, plus a 60% tariff on Chinese goods.
Trump didn't follow through on some threats back in 2018 and 2019. He may again be staking out a tough position to increase his negotiating leverage.
Still, Moody's figures that an across-the-board 10% tariff and moderate retaliation by trading partners could cause a shallow recession. Economic growth would be stunted by three percentage points in the first two years. Unemployment would top 5%, core consumer prices would rise an extra percentage point, and the S&P 500 would get a 6% haircut.
Election 2024 And Fed Rate Cuts
Moody's assumes that the Fed would respond to above-target inflation by slowing the pace of rate cuts. That would contribute to higher interest outlays and a sustained bump in the 10-year Treasury yield. The Fed might react differently, depending on how the economy looks.
Concern about a faltering job market prompted the Fed to cut its key rate by 50 basis points on Sept. 18, but that fear has faded as the economy has shown resilience. Q3 GDP rose at a 2.8% annual rate following 3% growth in Q2, the Commerce Department reported Wednesday. Consumers actually picked up the pace in Q3, spending at a 3.7% rate.
Wall Street is divided over whether the Fed needs to significantly cut interest rates. The 2024 election results will intensify that debate. Investors must weigh the risk that tax cuts, higher federal outlays and — if Trump wins — inflationary tariffs could bring a premature end to the Fed's rate-cutting cycle. The Fed starts its next meeting the day after the election. Fed Chair Jerome Powell will likely tiptoe around questions about fiscal policy.
Same Trump Policies, Different Economy
Trump's policy prescriptions may look a lot like those he enacted with some success in his first term. But economic conditions have changed. When he won the election in 2016, the U.S. economy arguably needed a jolt of stimulus. Inflation was too low, not too high. The Fed's key interest rate was below 1%, not close to 5%. And the federal budget deficit, equal to 3.1% of GDP, was less than half its bloated level in 2024.
"It should go without saying that economy does not need fiscal stimulus," David Kelly, chief global strategist at J.P. Morgan Asset Management, wrote Oct. 14.
With the economy at "full employment," extra demand spurred by tax cuts and government spending increases "wouldn't add to output — it would add to inflation."
The counterargument, made by Wilmington Trust's Roth, is that rates are so restrictive that the Fed can keep easing without fouling up inflation's clear path down to 2%. Roth sees a backdrop of improved productivity growth and an adequate labor supply, which would help the economy accommodate a fiscal boost.
"It's not entirely clear that even more fiscal excess necessarily results in a slower Fed," Roth said. That's partly because markets are bracing for bigger deficits by pushing up the 10-year Treasury yield, raising the cost of auto loans and mortgages. Higher long-term rates may make the Fed more sanguine about the inflation impact of lowering short-term rates.
Election 2024 Sweep May Awaken Bond Vigilantes
Jeffrey Buchbinder, chief equity strategist at LPL Financial, also highlights upside risk for the 10-year Treasury yield. In an Oct. 28 commentary, he pegged 4.3% as a key level. An S&P 500 correction in fall 2023 and a more moderate stock market pullback in April "both overlapped with a breakout in yields above this key area." On Friday, the 10-year Treasury yield surged eight basis points to 4.36%, despite a surprisingly weak jobs report. On Tuesday morning, the 10-year yield has stabilized around 4.33% as investors brace for election results.
A week ago, market strategist Ed Yardeni wrote that he expects the 10-year yield to stay between 4.25% and 4.5% through year-end. The S&P 500, he said, is likely to remain range-bound around 5,800 level amid "jitters about the bond market's response to the next administration's fiscal policies."
"We've also always said that when the bond market starts to worry about the federal deficit and debt, we will do so too," Yardeni wrote. "That may be beginning to happen," with no end to "reckless" fiscal policy in sight.
How To Position Your Investments For A Trump Or Harris Presidency
Trump Vs. Harris: Budget Cost
The 10-year net cost of Trump's proposals is $7.75 trillion, according to the Committee for a Responsible Federal Budget, including an extra $1 trillion in interest payments. The total cost of tax cuts plus some spending measures amounts to $10.4 trillion. Roughly $4 trillion would extend much of Trump's 2017 tax cuts, which are set to expire at the end of 2025.
Some other big-ticket items include cutting the corporate tax rate from 21% to 15% for domestic manufacturers ($200 billion), exempting tips from income taxes ($300 billion), exempting overtime income from taxes ($2 trillion), ending taxes on Social Security benefits ($1.3 trillion), and boosting military spending ($400 billion). A total of $3.7 trillion in revenue offsets would come mostly from tariffs ($2.7 trillion), canceling Inflation Reduction Act outlays, including tax credits for electric vehicles and energy and electricity production ($700 billion), and disbanding the Department of Education ($200 billion).
The takeaway: Even assuming a GOP election 2024 sweep, unless Trump follows through on his tariff plan, he'll need to find additional spending offsets or scale back his tax cuts.
Cost Of Harris Economic Policies Vs. Trump
The budget watchdog group puts the net cost of Harris' economic policies at $3.95 trillion, with a half trillion in extra interest. The cost of proposals totals $7.65 trillion, led by $3 trillion to renew the 2017 tax cuts for households earning no more than $400,000. Other big items include expanding the child tax credit and earned income tax credit ($1.4 trillion); renewing and expanding premium subsidies to buy Affordable Care Act coverage ($550 billion); expanded funding for prekindergarten and child care ($700 billion); expanding Medicare to cover long-term care, hearing and vision ($500 billion); and establishing paid national family and medical leave ($350 billion).
Funding for the Harris plan totaling $4.25 trillion over a decade comes mostly from raising the corporate tax rate to 28% from 21% ($900 billion); higher taxes on capital gains, dividends, stock buybacks and unrealized capital gains ($850 billion); raising the Medicare surcharge to 5% ($800 billion); raising taxes on corporations' overseas earnings ($550 billion); and expanding prescription drug negotiations ($250 billion).
Harris Vs. Trump: 2024 Election Odds
Election forecasters have Harris and House Democrats as slight underdogs. If Harris wins, Democrats would only need 50 seats to control the Senate, but that looks like a long shot. If Ohio Sen. Sherrod Brown ekes out his tight race, Democrats would still need a GOP incumbent to lose in Texas, Florida or Nebraska.
Even if Democrats pull off an unlikely sweep, it would only take one moderate to skewer some of Harris' least popular tax proposals.
S&P 500, Stock Market Thrive With Gridlock
"We still think that gridlock would be the most bullish outcome of the November 5 presidential and congressional elections, making it difficult for the next president to deliver on all the promises he or she made," Yardeni wrote.
Gridlock has a good track record. Dating back to 1958, elections with divided outcomes have averaged two-year S&P 500 gains of 20.7%. Elections delivering one-party rule have generated more middling returns, with an average two-year S&P 500 advance of 14.2%.
That's partly because divided government has typically delivered more austere budgets. That's what happened after the 2012 election's split outcome. To avoid a hard economic landing with all of the Bush 2001 and 2003 tax cuts set to expire at the start of 2013, President Obama and House Republicans reached a compromise. Obama let his 2 percentage point payroll tax cut expire while the House GOP accepted a return of the top income-tax bracket to 39.6% from 35%.
A sharp fiscal contraction followed, but it proved no restraint for the stock market. The S&P 500 soared 41% in the two years through Election Day 2014.
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Federal Budget Deficit After 2024 Election
Yet that kind of fiscal deal is hard to envision today, even if the 2024 election produces another divided outcome. The only real mention of cutting the deficit came at the very end of the campaign from Tesla CEO Elon Musk, who Trump may deputize to lead government efficiency efforts.
If Harris wins and the GOP takes the Senate, Deutsche Bank's economics team figures that she'll need to give up her tax hike plans to win support for any new spending, like expanding the child tax credit and earned income tax credit.
The federal deficit weighed in at $1.8 trillion in fiscal 2024, equal to roughly 6.4% of GDP. That's already the highest on record, outside of the World War II era, the aftermath of the 2008 financial crisis and the first two years of the pandemic. Deutsche Bank sees that rising to 7.9% of GDP in 2026, or $2.5 trillion, with a Harris presidency and divided Congress.
If Democrats sweep and enact Harris' agenda, the 2026 deficit would be a bit smaller at 7.3% of GDP, Deutsche Bank says. However, passing major tax hikes with the narrowest of majorities would be a challenge.
The smallest deficit (7.2% of GDP) would come under a Trump presidency and a divided Congress. But that's only if Trump goes big with tariffs while Democrats block deeper corporate income-tax cuts and an end to taxing Social Security benefits.
The biggest deficit (8.8% of GDP) would come if Republicans sweep the 2024 election and Trump sidelines his trade war.
Under any Trump vs. Harris outcome, Deutsche Bank expects higher deficits than if the 2017 tax cuts were simply all extended.
Fiscal Curve Ball For Federal Reserve
"Populism has won," ensuring that bigger budget deficits keep providing "lots of juice" to the economy, Stifel chief equity strategist Barry Bannister said in an Oct. 16 Bloomberg interview. Bannister sees a risk that the S&P 500 will keep rising on rate-cut expectations, providing yet more economic fuel, but then reverse lower as inflation surprises on the upside next year and the Fed is forced to play "catch-up."
While few on Wall Street expect resurgent inflation, economists are getting ready to rein in Fed rate-cut expectations. Deutsche Bank has predicted that the Fed's key policy rate will bottom around 3.5% by next fall. However, the Fed might stop at 3.75% or even 4.25%, Deutsche Bank chief U.S. economist Matthew Luzzetti wrote in an Oct. 22 note.
"If Trump were to front-load fiscal stimulus before pursuing a trade war, it would be hawkish for the Fed," he wrote. That's how Trump proceeded in his first term, passing tax cuts in 2017 before ratcheting up his trade war starting in 2018. Yet if tariffs are on a faster track, the Fed's floor might fall as low as 3%, Luzzetti said.
If Harris presides over a divided government, Deutsche Bank thinks the Fed's interest-rate floor might rise as high as 4%. A Harris sweep might be dovish. That could spur the Federal Reserve to cut as low as 3%, unless spending increases are sped up to offset the impact of tax hikes.
Election Day: When Polls Close And Votes Are Counted In Key States
Trump Vs. Harris: Disruption Or Status Quo
Trump's surprise victory in 2016 seemed to give the low-powered, post-financial-crisis economy and stock market a needed shot of adrenaline.
This time might feel more like an earthquake, with everything shifting at once. Gold's run to record highs may reflect that.
"Gold's perceived safe haven quality means it can be an all-inclusive expression of anxiety about departures from the status quo," Michael Hsueh, foreign exchange and commodities strategist at Deutsche Bank, wrote Oct. 24. Another Trump term won't just send federal debt to new heights and compel the Fed to reset policy, it will precipitate "disruptive breaks in trade, immigration and foreign policy." Hsueh wrote.
Undoubtedly, Trump's shake-up of the status quo would present openings for investors, but beneficiaries of the status quo could suffer. The Affordable Care Act and Inflation Reduction Act will come under attack in a Trump clean sweep. Markets have been bracing for that, with shares of Medicaid managed care companies, solar stocks and smaller EV plays like Rivian out of favor.
What This Trump Market Sentiment Indicator Signals Going Into The Election
Time To Blowtorch The 'Regulatory State'?
"We want to take a blowtorch to the regulatory state," House Speaker Mike Johnson said last week. "Trump's going to go big."
Roth is counting on a revamped regulatory backdrop under Trump that's a tailwind for the economy and asset prices. "I do think you're going to have more M&A activity" in sectors involving health care, hospitals, insurers, financials and energy companies, he said. "Those will all benefit in multiple ways from a Trump presidency."
Biden's biggest foreign policy initiatives also be may be undone under Trump. Export controls to keep advanced chips and chip equipment out of China's hands could be used by Trump as leverage to strike a trade deal with Beijing. That would have major implications for Nvidia, ASML and Taiwan Semiconductor Manufacturing.
In short, opportunity and danger will lurk everywhere in a Trump presidency. Yet if Harris wins, that could upend recent market bets against companies rewarded by the Biden administration. Gold and cryptocurrencies also could reverse recent pre-election gains.
Either way, get ready to build a portfolio and trading strategies that can handle serious volatility.
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