Not Just About The Candidates, Here’s How US Election Affects Investment Portfolios

Table of Contents

With the US 2024 election fast approaching, the political landscape is heating up as the incumbent Joe Biden, and former president Donald Trump declare their intentions to run for president. 

However, it is not the candidate who is most likely to win that matters. Instead, we should focus on how a change in America’s President could affect the market as a result of the policies that they are implementing.

Looking back on previous elections would provide useful insights into how a change in presidency affected US market sentiment. The S&P 500 Index averaged market results based on 1928 – 2016 presidential election outcomes, with a Republican candidate returning 15.3% and a Democrats candidate returning 7.6%.

Figure 1

Figure 2

Source: Morgan Stanley

Though the data can give us historical market trends, it is important to remember that past performance is not always indicative of future results. We can’t blatantly assume that if Donald Trump wins this year’s election, the market skyrockets, or when Joe Biden secures victory, the markets are experiencing major losses. 

Apart from the policies they’re pushing through, other factors such as investor sentiment, the current state of the economy, and geopolitical tensions will also play a significant role in shaping market behaviour – with the first often showing a positive impact in the short term.

Due to its considerable consequences on market movement in the short term, many investors are taking the contenders’ proposals during the election season into account. 

So, what are some of the policies the candidates proposed that make it relevant to the investment scene? We’ve broken them down as follows.

3 Major Elements of US Election That Could Be Affecting The Markets

  • Tariffs increment

A Republican candidate and Former President Donald Trump proposed imposing a 10% import tariff on all US goods from all countries and increasing the tariffs to 60% on China imports.

If he is elected, investors can expect an increase in tariffs on imported products, especially those sourced from China. With a significant impact on companies relying on imports, this proposal could lead to lowered profit margins, potentially reducing dividends paid out by shares to investors.

On the good side, his proposals could have an impact on strengthening the domestic economy in the US as well as USD currency. Those vying for investments in foreign currency trades can expect a potential increase in the value of the USD, offering favourable exchange rates and potentially higher returns.

Conversely, if he loses and Joe Biden takes office, the likelihood of lower profit margins and dividend payments decreases. Biden has expressed a preference for diplomacy and multilateral trade agreements and there may be a shift toward more stable trade relations with China and other countries – however, the dollar’s performance in the FX market may remain stagnant.

  • Tax cuts

The major contenders from Republicans and Democrats, Trump and Biden have different approaches regarding the current Tax Cuts and Jobs Acts, which have lowered many Americans’ tax bills. Expiring in 2025, Trump devises to extend the tax cuts for all taxpayers, including big corporations and higher tax brackets, with the aim of stimulating economic growth and incentivizing investment.

On the other hand, Biden proposes that the extension only applies to demographics earning less than $400,000, resulting in higher federal taxes for big corporations and those in higher tax brackets, whom his proponents refer to as ‘the wealthy’.

While this seems promising for the investment portfolio, tax cuts only provide short-term company profits and increase market prices. The reduction in government revenue resulting from less money going into the government and more into private hands is likely to be unsustainable. In the long run, the burden will shift to increasing interest rates and inflation is expected to rise, hurting long-term bond investments and the consumers’ purchasing power.

  • Sector-related concerns

Biden and Trump have different concerns in economic policy, and the sentiments they have can influence price movements in related sectors.

Just recently, Biden made a promise to invest in clean energy sectors, emphasising the creation of ‘tens of thousands of clean energy jobs’. This commitment corresponds with plans for electric vehicle production at a shuttered Illinois plant and EV charging station projects by the International Brotherhood of Electrical Workers – this further signals a possibly favourable outlook for green energy stocks if he returns to the office.

On the other hand, Trump remains strong in pursuing his ‘America First’ agenda. Aside from strengthening domestic industries, this agenda could also include strengthening the national defence system. This could indicate that financial, aerospace, and defence stocks are expecting to thrive, as they frequently do under Republican administrations.

Whoever Wins, History Has Shown Likeliness for End The Year Positive

The volatility that occurs during pre-election days is likely to be short-term. Corporations and investors will focus on increasing their profits in the long term whoever takes the administration; Democrats or Republicans.

Historical data reveals that despite short-term fluctuations surrounding election years, the S&P 500 Index almost always ends the year positively. However, this is not always the case, especially during the 2008 election when Democratic candidate Barack Obama took office. The average returns plummeted to -37% due to the financial crisis happening that year.

So, unless major unforeseen events occur this year, markets are likely to continue to end the year positively. However, patience and staying informed are crucial, both helping to ease anxieties related to market volatility and understand what to expect from the uncertainties that arise this year.

Conclusion

Election year is a season full of uncertainties for many investors. However, those who are experienced in market analysis see this as an opportunity to earn significant gains once the market volatility subsides and corrections are seen.

Still doubting whether to invest during this election season? Or unsure which dollar-denominated stocks to invest in?

Together with UOB Kay Hian, you can achieve your gains confidently. We’ll guide you through navigating the uncertain market with insightful research and you can leverage Utrade for trading US stocks confidently.

For further information, kindly subscribe to our newsletter or join the UOB Kay Hian Telegram channel today.

EXPLORE MORE

Check our other research exploration about U.S. 2024 Election

Next week, on Thursday, June 27th, the first U.S. presidential debate will take place. There…

Election Rollercoaster – Trump ahead in Polls, Biden holds Favourable Odds Over the last several…

Interest rates are a key aspect of bond investments. The interest rates announced by the…

DISCLAIMER

This website provides access to information and materials published strictly for general informational and educational purposes only. These information and materials do not take into account your specific investment objectives, financial situation or particular needs. You should seek advice from a financial adviser regarding the suitability of any investment product described therein, taking into account your specific investment objectives, financial situation or particular needs, before you make a commitment to invest or transact in such investment product.

The use of this website is subject to Singapore law and the Terms of Use of this website. Please read the Terms of Use carefully.

By accessing or using this website or any materials or information contained herein, you (i) acknowledge that you have read and understood the Terms of Use and (ii) accept and agree to be bound by the Terms of Use.