How would markets fare if the US Democrats win in November?

Kamala Harris has made a strong start to her campaign since Joe Biden dropped out of the race. She is polling very close to Donald Trump and, although the betting markets still have him as the favourite, the gap has narrowed sharply and they are almost neck and neck. So this week’s Market Perspectives’ will take a look at how financial markets might fare were she to become President.

The first and most obvious point is that she is the continuity candidate, with an agenda similar in many ways to that pursued by the current President. Reduced uncertainty would naturally translate into less volatility and great financial confidence. Were she to gain the White house, the market would price out the radical program that it had anticipated under a Trump Presidency.

A Harris Presidency would involve lower tariffs, less government borrowing and a continuation of Biden’s agenda in terms of climate change, increased infrastructure spending and greater regulation. Another key difference relates to taxes. There is a strong belief amongst Democrats that the US tax system favours the wealthy. In particular, a Harris administration would like to raise the corporate tax rate to 25%. They would also seek to raise taxes on higher incomes by reining in the myriad of offsets available to high earners. But to do this would require control of Congress.

Were Harris to continue her strong performance in the run up to the election, were Trump to founder, the Democrats might retain control of the Senate and regain the House of Representatives. In that scenario, despite the improvement in terms of stability and a lower fiscal deficit, higher corporate taxes would weigh on equities. A clean sweep would also allow Harris to pursue her personal agenda, promoting the ‘care economy’. This would involve improved access to child care, paid family leave and funding for education.

Risk assets might therefore perform better under a Harris Presidency if the Senate or the House were under Republican control as that would keep taxes down. The races for both the House and the Senate are, like the Presidency itself, too close to call. But they are not independent and if Harris were to establish a reasonable lead over Trump, most observers would assume that a clean sweep for the Democrats was more likely.

More generally, we have to consider the fundamental economic backdrop. After a distinctly tricky period, the Federal Reserve finally seems to have got inflation back under control. In contrast to the expectations of many (including me) that this would require a recession, the US economy has prospered even as interest rates rose. There now seems to be a slowdown underway which, given the improvement in inflation, will allow the Fed to start cutting interest rates. Moderate growth, low inflation and falling interest rates constitute a favourable background for bonds and equities alike.

So, to sum up, the result of this year’s Presidential election is close to a coin toss. Assessing the market implications involves judging whether either party would get a clean sweep. Equites would delight in lower corporate taxes which should offset the increased uncertainty associated with a Trump White house. But before we get to November, the economic fundamentals will dominate. And those seem favourable.

Next week’s Market Perspectives’ will get back to examining fundamentals which could well look quite different after a bumper week of economic data, central bank decisions and earnings reports.