September 2024
US Election Perspectives 2024
While we feel it’s important for investors to familiarize themselves with the policy proposals of the major party candidates, historically, electoral outcomes haven’t had major lasting impacts on market performance.
By JONATHAN W. HUBBARD, CFA Managing Director, Strategy and Insights Group, BRAD RUTAN, CFA Managing Director, Strategy and Insights Group and MICHAEL DEMBRO Lead Strategist, Strategy and Insights Group.
Summary
As we enter the final months of the 2024 election cycle, alliances are being formed, policy positions are crystalizing and those yet undecided are moving closer to their preferred candidate. In this preview, we’ll put the election into historical context and highlight some of the key policy similarities and differences of the candidates. Tax policy will be a focus and will be heavily influenced by whether one party controls both the executive and legislative branches or if power is split between them. Tariffs and regulation are two other areas of focus. Both Republicans and Democrats have become more protectionist over the last decade, while the regulatory environment is in flux following a pivotal Supreme Court ruling early this summer.
While we feel it’s important for investors to familiarize themselves with the policy proposals of the major party candidates, historically, electoral outcomes haven’t had major lasting impacts on market performance. Markets have been able to withstand wars, recessions and even pandemics while prospering over the long term. Surprisingly, the historical stock market performance disparities are modest regardless of which party controls the White House and Congress. The best results tend to come during periods of divided government, but markets can react in unexpected ways, as they did in 2016. While it’s tempting to get caught up in political narratives, investors would be wise to stay focused on their investment goals and objectives and keep politics out of their portfolios.
While it’s tempting to get caught up in political narratives, investors would be wise to stay focused on their investment goals and objectives and keep politics out of their portfolios.
Fiscal Spending and Tax Policies
The United States has run a fiscal deficit for nearly a quarter century, a trend which is expected to continue for at least the next decade. While deficits are a hot topic among Washington’s deficit hawks and a small subset of voters, budget shortfalls tend to fly under the radar of most of the electorate. The pandemic accelerated already-high levels of spending, with more than $4.6 trillion of stimulus deployed during a three-year period, at one point pushing the deficit to over 15% of GDP. The impact on an economy flush with cash was clear: Both consumer spending and inflation surged.
Regardless of who prevails in November, we expect both candidates would run substantial fiscal deficits. However, the nature of the candidates’ spending priorities is quite different. Harris is running on a platform of $25,000 tax credits for first-time homeowners and a $6,000 credit for the families of newborns. She plans to raise the corporate tax rate to 28% from the current level of 21%. She also plans to address what she sees as price gouging by
grocery stores, although the validity of the issue and the mechanism to correct it are unclear. Harris has also promised to raise the federal minimum wage and eliminate taxes on tips for restaurant and hospitality workers, an idea first proposed by former President Trump.
In addition to eliminating taxes on tips, Trump has pledged to extend and make permanent the Tax Cut and Jobs Act of 2017, passed during his first term and slated to expire at the end of 2025. The tax changes that reduced corporate taxes from 35% to 21% as part of this package will not expire, but those for individuals will. Strengthening and modernizing the US military is one of the former president’s 20 key agenda items, so under Trump 2.0, we would expect defense spending, which has remained stagnant for years, to increase.
While some policies can be enacted by executive order, more significant changes require Congressional approval, making the composition of the next Congress a critical lynchpin.
The Labor Market
The slowing labor market has come into sharper focus for the market. Here’s how the two candidates might influence employment trends in the US.
Economies run on labor, and labor requires headcount. Absent increases in productivity, an economy needs an expanding workforce to grow. If Trump is elected, he’s promised to secure the southern border, decrease illegal immigration and deport millions of undocumented immigrants. Harris is running on a platform of securing the border while broadening legal immigration and creating a pathway to citizenship for those already in the country. In a country where the birth rate is below the replacement level, some amount of immigration is necessary to avoid the rapid aging of the working population and workforce shrinkage seen in many European countries and in China. Though immigration is a polarizing topic, in our view, the US economy is unlikely to thrive without it.
Democrats have historically won the union vote, but Trump’s 2016 victory was secured by stronger-than-normal support from union members in key battleground states. For Harris to win, she will need to secure the labor vote, but will also need to convince other working-class voters that her economic plan will ease the financial strains they’ve felt over the past four years, something the administration she has been a part of has struggled to do.
Both candidates have supported eliminating taxes on tips for service workers. However, most service workers do not make enough to pay income taxes, so the economic benefit from this policy is likely to be muted. Harris has suggested increasing the $2.13 federal subminimum wage for tipped workers. That wage has remained unchanged since 1991 and is much lower than the federal minimum of $7.25 an hour for non-tipped workers. While consumers pay most of tipped workers’ wages today, raising the subminimum wage would increase costs for businesses, many of which are already struggling with higher labor costs for other positions.
Tariffs Become Commonplace
While former President Trump implemented the most extensive use of tariffs since the 1930s, his successor, President Joe Biden, kept most of them in place and, with respect to China, even expanded them. We expect a second Trump term to bring an increased use of import duties to protect American industries and to use the threat of them as a foreign policy tool. Vice President Harris would likely keep the existing tariffs on Chinese goods in place but might be less motivated to place them on key trading partners such as the European Union, Canada and Mexico. Trump has proposed a 60% tariff on all imports from China and a levy of as much as 20% on goods imported from elsewhere. Harris has been less specific on tariffs but is expected to maintain existing duties on Chinese imports, in line with the policy of the Biden administration. Since the imposition of tariffs early in the first Trump term, many consumer cyclical companies have diversified their manufacturing bases away from China and into other Asian countries and Mexico. However, increased tariffs on goods from China would remain a headwind to economic growth.
Decades ago, tariffs were used to provide the federal government with needed revenue and to protect American industries and jobs. Today, proponents of tariffs also deem them necessary to protect American intellectual property. Regardless of their rationale and historical effectiveness, the levying of tariffs in today’s global trade environment will likely continue to be met with retaliatory duties by affected countries, hampering global trade and potentially increasing costs to the consumer over the long term.
Tariffs can be effective in specific cases, but their cumulative effect usually results in higher prices for Americans, lower economic growth and increased geopolitical tensions. Lastly, over the past 100 years, Congress has ceded more and more power over tariffs to the executive branch, and we would expect the candidates to take advantage of this authority to enact their individual agendas.
Contrasting Approaches to Regulation
Harris’s agenda is centered around regulating costs for consumers.
Trump seeks to reduce regulations that stifle economic growth.
While presidential administrations have traditionally had wide latitude in imposing regulations, recent Supreme Court decisions could potentially increase Congress’s role in setting the regulatory agenda at the expense of the executive branch. How much of the campaign’s rhetoric will come to fruition? PolitiFact reported that only 23% and 28%, respectively, of the policy promises that Trump and Biden made during their first campaigns were kept. Time will tell, but we don’t believe investing based on campaign rhetoric is a sound philosophy.
Divided Government a Positive for Stocks
Our research shows that US equity returns have historically been strong in presidential election years, averaging 7.5% since 1928. In our opinion, the second-best year for returns typically come in the last year of the four-year presidential cycle, with most of the returns generated in the year’s second half. But what’s most surprising is that stock volatility, as measured by annual standard deviation, is nearly identical during election years and non-election years, going back to 1928.
Markets hate uncertainty, and that tracks with the fact that they perform better in the fourth year of a president’s first term than that of a lame duck president. However, this is an unusual election given Biden’s atypical lame-duck status, so we can potentially rip up that script.
Historical analysis shows that equity markets don’t have a strong preference for which party controls Congress. The reality is that the best performance has been achieved with a divided Congress regardless of who is in the White House because having checks and balances in place between the branches of government helps prevent the passage of overly ambitious policies which can create uncertainty and volatility in the markets.
While presidential elections matter to the economy and the markets, we believe they matter less than most investors think. Presidents may influence inflation, but they don’t control supply chains, the velocity of money or base effects. They can propose tax rates, but they can’t anticipate how companies and the public will react to them. And while they may govern during a bull market (and hope to take credit for it), there are many factors that determine the fate of the stock market that are outside of the control of politicians. This election is important, but in our view, rigorous fundamental analysis of companies and markets will have more to do with investor outcomes than political analysis.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
The S&P 500 Index measures the broad US stock market. Index performance does not take into account fund fees and expenses. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
This data is not intended to represent the performance of any MFS portfolio. For more information on any MFS product, including performance, visit mfs.com. For illustrative purposes only.
“Standard & Poor’s“ and S&P “S&P“ are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500 is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as the Advisor’s investment advice, as securities recommendations, or as an indication of trading intent on behalf of MFS. Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.
As we enter the final months of the 2024 election cycle, alliances are being formed, policy positions are crystalizing and those yet undecided are moving closer to their preferred candidate. In this preview, we’ll put the election into historical context and highlight some of the key policy similarities and differences of the candidates. Tax policy will be a focus and will be heavily influenced by whether one party controls both the executive and legislative branches or if power is split between them. Tariffs and regulation are two other areas of focus. Both Republicans and Democrats have become more protectionist over the last decade, while the regulatory environment is in flux following a pivotal Supreme Court ruling early this summer.
While we feel it’s important for investors to familiarize themselves with the policy proposals of the major party candidates, historically, electoral outcomes haven’t had major lasting impacts on market performance. Markets have been able to withstand wars, recessions and even pandemics while prospering over the long term. Surprisingly, the historical stock market performance disparities are modest regardless of which party controls the White House and Congress. The best results tend to come during periods of divided government, but markets can react in unexpected ways, as they did in 2016. While it’s tempting to get caught up in political narratives, investors would be wise to stay focused on their investment goals and objectives and keep politics out of their portfolios.
While it’s tempting to get caught up in political narratives, investors would be wise to stay focused on their investment goals and objectives and keep politics out of their portfolios.
The United States has run a fiscal deficit for nearly a quarter century, a trend which is expected to continue for at least the next decade. While deficits are a hot topic among Washington’s deficit hawks and a small subset of voters, budget shortfalls tend to fly under the radar of most of the electorate. The pandemic accelerated already-high levels of spending, with more than $4.6 trillion of stimulus deployed during a three-year period, at one point pushing the deficit to over 15% of GDP. The impact on an economy flush with cash was clear: Both consumer spending and inflation surged.
Regardless of who prevails in November, we expect both candidates would run substantial fiscal deficits. However, the nature of the candidates’ spending priorities is quite different. Harris is running on a platform of $25,000 tax credits for first-time homeowners and a $6,000 credit for the families of newborns. She plans to raise the corporate tax rate to 28% from the current level of 21%. She also plans to address what she sees as price gouging by
grocery stores, although the validity of the issue and the mechanism to correct it are unclear. Harris has also promised to raise the federal minimum wage and eliminate taxes on tips for restaurant and hospitality workers, an idea first proposed by former President Trump.
In addition to eliminating taxes on tips, Trump has pledged to extend and make permanent the Tax Cut and Jobs Act of 2017, passed during his first term and slated to expire at the end of 2025. The tax changes that reduced corporate taxes from 35% to 21% as part of this package will not expire, but those for individuals will. Strengthening and modernizing the US military is one of the former president’s 20 key agenda items, so under Trump 2.0, we would expect defense spending, which has remained stagnant for years, to increase.
While some policies can be enacted by executive order, more significant changes require Congressional approval, making the composition of the next Congress a critical lynchpin.
The slowing labor market has come into sharper focus for the market. Here’s how the two candidates might influence employment trends in the US.
Economies run on labor, and labor requires headcount. Absent increases in productivity, an economy needs an expanding workforce to grow. If Trump is elected, he’s promised to secure the southern border, decrease illegal immigration and deport millions of undocumented immigrants. Harris is running on a platform of securing the border while broadening legal immigration and creating a pathway to citizenship for those already in the country. In a country where the birth rate is below the replacement level, some amount of immigration is necessary to avoid the rapid aging of the working population and workforce shrinkage seen in many European countries and in China. Though immigration is a polarizing topic, in our view, the US economy is unlikely to thrive without it.
Democrats have historically won the union vote, but Trump’s 2016 victory was secured by stronger-than-normal support from union members in key battleground states. For Harris to win, she will need to secure the labor vote, but will also need to convince other working-class voters that her economic plan will ease the financial strains they’ve felt over the past four years, something the administration she has been a part of has struggled to do.
Both candidates have supported eliminating taxes on tips for service workers. However, most service workers do not make enough to pay income taxes, so the economic benefit from this policy is likely to be muted. Harris has suggested increasing the $2.13 federal subminimum wage for tipped workers. That wage has remained unchanged since 1991 and is much lower than the federal minimum of $7.25 an hour for non-tipped workers. While consumers pay most of tipped workers’ wages today, raising the subminimum wage would increase costs for businesses, many of which are already struggling with higher labor costs for other positions.
While former President Trump implemented the most extensive use of tariffs since the 1930s, his successor, President Joe Biden, kept most of them in place and, with respect to China, even expanded them. We expect a second Trump term to bring an increased use of import duties to protect American industries and to use the threat of them as a foreign policy tool. Vice President Harris would likely keep the existing tariffs on Chinese goods in place but might be less motivated to place them on key trading partners such as the European Union, Canada and Mexico. Trump has proposed a 60% tariff on all imports from China and a levy of as much as 20% on goods imported from elsewhere. Harris has been less specific on tariffs but is expected to maintain existing duties on Chinese imports, in line with the policy of the Biden administration. Since the imposition of tariffs early in the first Trump term, many consumer cyclical companies have diversified their manufacturing bases away from China and into other Asian countries and Mexico. However, increased tariffs on goods from China would remain a headwind to economic growth.
Decades ago, tariffs were used to provide the federal government with needed revenue and to protect American industries and jobs. Today, proponents of tariffs also deem them necessary to protect American intellectual property. Regardless of their rationale and historical effectiveness, the levying of tariffs in today’s global trade environment will likely continue to be met with retaliatory duties by affected countries, hampering global trade and potentially increasing costs to the consumer over the long term.
Tariffs can be effective in specific cases, but their cumulative effect usually results in higher prices for Americans, lower economic growth and increased geopolitical tensions. Lastly, over the past 100 years, Congress has ceded more and more power over tariffs to the executive branch, and we would expect the candidates to take advantage of this authority to enact their individual agendas.
Harris’s agenda is centered around regulating costs for consumers.
Trump seeks to reduce regulations that stifle economic growth.
While presidential administrations have traditionally had wide latitude in imposing regulations, recent Supreme Court decisions could potentially increase Congress’s role in setting the regulatory agenda at the expense of the executive branch. How much of the campaign’s rhetoric will come to fruition? PolitiFact reported that only 23% and 28%, respectively, of the policy promises that Trump and Biden made during their first campaigns were kept. Time will tell, but we don’t believe investing based on campaign rhetoric is a sound philosophy.
Our research shows that US equity returns have historically been strong in presidential election years, averaging 7.5% since 1928. In our opinion, the second-best year for returns typically come in the last year of the four-year presidential cycle, with most of the returns generated in the year’s second half. But what’s most surprising is that stock volatility, as measured by annual standard deviation, is nearly identical during election years and non-election years, going back to 1928.
Markets hate uncertainty, and that tracks with the fact that they perform better in the fourth year of a president’s first term than that of a lame duck president. However, this is an unusual election given Biden’s atypical lame-duck status, so we can potentially rip up that script.
Historical analysis shows that equity markets don’t have a strong preference for which party controls Congress. The reality is that the best performance has been achieved with a divided Congress regardless of who is in the White House because having checks and balances in place between the branches of government helps prevent the passage of overly ambitious policies which can create uncertainty and volatility in the markets.
While presidential elections matter to the economy and the markets, we believe they matter less than most investors think. Presidents may influence inflation, but they don’t control supply chains, the velocity of money or base effects. They can propose tax rates, but they can’t anticipate how companies and the public will react to them. And while they may govern during a bull market (and hope to take credit for it), there are many factors that determine the fate of the stock market that are outside of the control of politicians. This election is important, but in our view, rigorous fundamental analysis of companies and markets will have more to do with investor outcomes than political analysis.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg neither approves or endorses this material, or guarantees the accuracy or completeness of any information herein, or makes any warranty, express or implied, as to the results to be obtained therefrom and, to the maximum extent allowed by law, neither shall have any liability or responsibility for injury or damages arising in connection therewith.
The S&P 500 Index measures the broad US stock market. Index performance does not take into account fund fees and expenses. It is not possible to invest directly in an index. Past performance is no guarantee of future results.
This data is not intended to represent the performance of any MFS portfolio. For more information on any MFS product, including performance, visit mfs.com. For illustrative purposes only.
“Standard & Poor’s“ and S&P “S&P“ are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”) and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”) and have been licensed for use by S&P Dow Jones Indices LLC and sublicensed for certain purposes by MFS. The S&P 500 is a product of S&P Dow Jones Indices LLC, and has been licensed for use by MFS. MFS’ products are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or their respective affiliates, and neither S&P Dow Jones Indices LLC, Dow Jones, S&P, their respective affiliates make any representation regarding the advisability of investing in such products.
The views expressed herein are those of the MFS Investment Solutions Group within the MFS distribution unit and may differ from those of MFS portfolio managers and research analysts. These views are subject to change at any time and should not be construed as the Advisor’s investment advice, as securities recommendations, or as an indication of trading intent on behalf of MFS. Unless otherwise indicated, logos and product and service names are trademarks of MFS® and its affiliates and may be registered in certain countries.