So much has been said in recent weeks about the US presidential election, and it no doubt remains top of mind among investors this week, writes Vasu Menon, managing director of investment strategy at OCBC. “Markets are nervous and waiting with bated breath for the outcome.”
Menon himself had opined about the impact of Donald Trump’s shooting in July, adding later that month that a Kamala Harris win would be good for markets. After the two US presidential nominees faced off in their first debate on the morning of Sept 11, Singapore time, Menon said the debate “would not move the needle” as neither candidate had come out as a clear winner.
In Menon’s latest commentary, released Nov 1, he points to five things to “keep in mind” as the US goes to the polls this week.
1. Electoral college votes matter, not popular votes
It is not the popular votes that count in the US presidential election. “Even if a candidate wins most of the votes, he or she can still lose the US Presidential election, as Hillary Clinton found out against Trump in 2016,” says Menon.
Clinton won 48% of the popular votes versus Trump’s 46%, but still went on to lose the election by a wide margin.
See also: What Trump 2.0 means for investors
In the US, a candidate becomes President through a system called the Electoral College, which allots electoral votes to the 50 states and the District of Columbia largely based on their population.
There are a total of 538 electoral votes and a candidate needs to secure 270 to win. In 2016, Clinton won 227 electoral votes while Trump won 304. He went on to win the election, even though he had fewer popular votes.
“It is often a question of which candidate can secure the larger ‘swing states’ that give them the most electoral seats. These ‘swing states’ have populations that are closely divided politically. They have swung back and forth between Democratic and Republican candidates in recent years. They are the battleground states that candidates have targeted,” says Menon.
For 2024, Wisconsin, Michigan, Arizona, Nevada, Georgia, North Carolina and Pennsylvania have been identified as the swing states. Collectively, they offer 93 electoral votes that are expected to be pivotal in the White House race between Harris and Trump.
2. US election uncertainty may not disappear after Nov 5
There is a risk that the outcome of the presidential election may not be known so soon. In 2020, it took four days before major new agencies projected Joe Biden as the winner.
“Given that this year’s presidential election is a very close call, especially in the swing states, projections may take longer,” says Menon.
Menon also does not rule out the risk of a recount, as seen in the 2000 Presidential election between Al Gore and George Bush. “This is especially so if the vote tallies in some swing states show only a marginal difference between the candidates. There is also a risk that if Trump loses, he may challenge the results in court, which may delay the outcome.”
If Trump wins the election, there may be uncertainty about what he will do next by way of policy, says Menon. “He has spoken of many things in his campaign trail — like making the tax cuts he enacted in 2017 (which expire in 2025) permanent, cutting the corporate tax rate, imposing 10% tariffs on all US imports and 60% tariffs on Chinese imports, and mass deportation of illegal immigrants. It remains unclear whether he will indeed implement all or some of these policies and which he will implement first.”
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3. Historically, markets have done well after US elections
A look back over the past four decades shows the S&P 500 index posting positive total returns in a president’s inaugural year “most of the time”, says Menon. The only exception was in 2001, when the US economy slipped into a recession after the dot-com bubble burst.
For investors, this is heartening to know, he adds. “However, it is not a guarantee that we will get another positive year in 2025. However, if economic and earnings fundamentals show resilience and if US monetary policy remains accommodative, another positive year in 2025 cannot be ruled out.”
| President | Inaugural year | S&P 500 index total returns |
|---|---|---|
| Reagan (2nd term) | 1985 | 31.6% |
| Clinton (1st term) | 1993 | 10.1% |
| Clinton (2nd term) | 1997 | 33.4% |
| Bush (1st term) | 2001 | -11.9% |
| Bush (2nd term) | 2005 | 4.9% |
| Obama (1st term) | 2009 | 26.5% |
| Obama (2nd term) | 2013 | 32.4% |
| Trump | 2017 | 21.8% |
| Biden | 2021 | 28.7% |
4. US elections are not just about the president
Nearly 187 million Americans are eligible to vote in the Nov 5 election to choose the 47th US president of the United States.
While a great deal of focus goes to the presidential race, the elections are also taking place in Congress — both for the House of Representatives and the Senate. Ultimately, whoever controls Congress controls the ability to pass legislation, among other powers.
This could “buoy or doom” any incoming president’s agenda, says Menon. “Hence, the outcome of Congressional elections is as important as the Presidential race.”
34 Senate seats are up for a vote this election year. Of these, eight races are considered tightly competitive, and the odds are not on the Democrats’ side, says Menon. Seven of those eight embattled seats are currently occupied by Democrats. Only one Republican-held seat is considered up for grabs.
In the House of Representatives, all the 435 seats are slated for election, and the ballot for these seats take place once every two years.
5. Is a Trump or Harris victory better for equities, bonds and US fiscal sustainability?
Opinion polls and betting markets in the US show Trump gaining significant momentum against Harris in recent weeks. The surge in US Treasury yields and higher Bitcoin prices are also an indirect indication that markets think that Trump could win.
According to a recent Bloomberg Markets Live Pulse survey, a victory for Trump would be more beneficial for stocks compared to a Harris presidency. Some 38% of the 350 respondents see equities accelerating a year from now under Trump, versus 13% under Harris.
Menon thinks the market may initially react positively to a Trump victory, especially if the Republicans make a clean sweep of Congress, and if investors focus on Trump’s plans for lower taxes, deregulation and lower oil prices.
After all, US stocks based on the S&P 500 index had soared by nearly 70% when Trump was president from 2017 to 2020. “Investors who remember how Trump’s tax cuts in 2017 helped fuel a stock rally will probably send US share prices higher if Trump wins.”
However, the medium-term outlook could become cloudier if Trump pursues aggressive tariff hikes and mass deportation of more than 11 million illegal immigrants, which could lead to labour shortages.
According to Menon, this could fuel inflation eventually and stop the US Federal Reserve from cutting rates. “Tariffs also carry the risk of retaliation from the major trading partners like the European Union and China, which could complicate the outlook for the US economy.”
There is also a risk that the US economy may be hurt in time if the tariffs and a tighter labour market raise business costs and affect profits, adds Menon.
While lower taxes and deregulation may boost equity markets, the fiscal strain posed by tax cuts and higher spending may cause the “already-high” US budget deficit to expand further, which could cause US Treasury yields to rise further, notes Menon.
“This could weigh on bond markets, especially longer dated bonds. Inflation — emanating from lower taxes, immigration curbs and the tariffs, may also cause the Fed to pause or halt rate cuts, which is another headwind for bonds,” he adds.
A Harris victory, along with a clean sweep of Congress by the Democrats, should be “neutral to positive” for both equities and bonds, says Menon. “The benefits of greater fiscal spending and continued Fed rate cuts could be offset to some extent by tax hikes and the risk of more regulations under a Harris administration. The generous tax cuts that Trump had enacted in 2017 could also expire as scheduled in 2025 under Harris, causing tax rates to rise which is not the best news for the economy and equity markets in 2026.”
That said, the tax and spending plans of both Trump and Harris would likely further increase the US budget deficits and debt above the levels projected under current law, according to the non-partisan Committee for a Responsible Federal Budget.
Neither candidate has put forward a plan to address the rising debt burden. Harris’s plan is estimated to increase the US government debt by US$3.95 trillion through 2035, while Trump’s plan would increase the debt by a larger US$7.75 trillion, notes Menon.
“This could place upward pressure on US bond yields in the long term and prevent them from falling sharply, unless the US economy slows sharply or slips into a recession, and the Fed tries to support the economy with sharp rate cuts,” he adds.
Don’t lose sight of market fundamentals
In the heat of a major election, it can be easy to lose sight of market fundamentals, which is often a more important driver of performance, says Menon. “Investing based on political expectations may not be the best approach for longer-term investors.”
The US political system, with a very long history, should not be underestimated as it is designed to be inherently stable, he adds. “Even if the Republicans take full control of the presidency and US Congress, they may not be able to overhaul the entire system. There may be conservative elements in both the Republican and Democratic party who will prevent this from happening. Also, there is still a third branch of the US federal government that politicians will need to contend with — the US judiciary — which can intervene if necessary.”
In addition, Menon believes Trump himself may “hold back from doing anything drastic” if he feels that it could hurt the economy and stock market, which he sees as a report card of his performance.
Geopolitics is often noise in the background, says Menon. “What eventually matters are fundamentals and liquidity. So, if we have a soft landing in the US economy and earnings continue to deliver, global stock markets should have more upside in the medium term, supported by lots of liquidity on the sidelines looking for bargain hunting opportunities on pullbacks.”
But investors should not expect markets to move up in a straight line, he adds. “Brace for greater volatility in the coming months. In a nutshell, stay invested, keep a diversified portfolio to hedge against uncertainties and geopolitical risks, and time-diversify your portfolio by dollar cost averaging over the coming months.”
Photos: Bloomberg
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