The final stretch: Your top 3 U.S. election questions answered

Stocks fell and bond yields surged last week as investors geared up the Presidential Election.

More swings in the betting odds drove a lot of the moves – with investors taking some of their “Trump trade” chips off the table to start this week. A flurry of polls released over the weekend showed that the election might not be as clear-cut as betting odds have been suggesting.

Focusing on what we do know, the data last week showed that the U.S. economy continues to be in solid shape. The economy expanded at a strong pace in the third quarter (+2.8% annualized pace). Consumption was particularly strong, growing 3.7% (versus consensus estimates of 3.3%). And Friday’s nonfarm payrolls showed that the unemployment rate remained low at 4.1% in October, albeit with a weaker headline number of jobs added due to distortions from recent hurricanes and strikes.

With the economy proving resilient, the corporate world also continues to perform. The busiest earnings week of the Q3 season included reports from more than 40% of the total market capitalization for the S&P 500. In short, the mega cap tech stocks are showing no signs of slowing – with profits and capital expenditure on the rise. However, investors are holding those names to an ever-rising standard – something that showed with the negative stock price reaction from the likes of Apple and Meta.

In other news, the UK Budget caused some jitters for investors. A more expansionary fiscal stance caused concerns about potential inflationary impacts and the sustainability of rising debt levels. With big moves higher in UK Gilt yields and a falling pound, Chancellor Rachel Reeves later sought to steady the ship in an interview with Bloomberg. This is no mini-Budget moment, but it shows that markets are watching what governments are doing to manage debt.

While acknowledging that we have some important data and central bank meetings (including the Fed) this week, we’d be remiss not to focus on the election in today’s piece. Uncertainty may be high now, but we want to offer our thoughts on three of the most important issues to investors: tax policy, government debt and deficits, and what happens if the race is too close to call.

Election preview

1. What will happen with tax policy? Congress will need to focus on tax policy next year. At the end of 2025, many of the provisions from the 2017 Tax Cuts and Jobs Act (TCJA) are set to expire. If Congress does nothing, individual tax rates would revert to 2017 levels, the 20% deduction for small business income would end, and the estate tax exemption would be cut in half (from USD 28.6 million to USD 14.3 million for a married couple). Importantly, the corporate tax cuts included in the TCJA were permanent. In all, if the temporary provisions in the TCJA expire, personal tax rates would likely revert higher, and it may result in a 1.8% reduction in after-tax income for all U.S. households, as well as a 3.1% reduction for the top 1% of earners.

This is why we think at least a partial extension of the TCJA is likely under any potential composition of government. Former President Trump proposes extending all of the 2017 tax cuts. Vice President Harris is proposing a partial extension of cuts, but allowing cuts to expire for households making $400,000+. Of course, the House and Senate will have a lot to say about the shape of tax policy, so watching more than just the results of the presidential race is critical.

Any changes will clearly have an impact of American consumers, and on the economy as a whole. Focusing on tax-efficiency could become an important point for U.S. tax payers in 2025.

2. How bad could it get with the debt and deficit? Neither candidate has made lowering the U.S. fiscal deficit a focus of their campaigns. In fact, we think the deficit will grow under either candidate. If all of the policy proposals from the campaign trail become reality (unlikely), the deficit could increase by over $1 trillion over the next 10 years under Harris, and by nearly $4 trillion under Trump.

This is why it makes some sense that bond yields have increased along with the odds of a Republican sweep. But we think the more important driver recently has been surprisingly strong U.S. economic growth, labor market and consumption data. Heading into the election, the Bloomberg Treasury Index is set for its first monthly loss since April.

While we view the debt and deficit trajectory as a risk, we think some of the fear is misplaced. In fact, current all-in yields give investors a second bite at the apple. For anyone who felt they missed the opportunity to add to core bonds, this may be your second chance. 

3. What happens if the election is too close to call? In a standard election, the presidential candidate can often be confirmed on the night of the election. Traditionally, the Associated Press declares winners on a state-by-state basis only when it is confident that the trailing candidates no longer have a path to victory in that state. Once a candidate accumulates 270 electoral college votes, the AP and media agencies call the race. 

After election day, a standard process is followed through to Inauguration Day, outlined in the table below.

In certain cases, it takes longer to count the votes, or a race is too tight to determine a winner. For example, AP did not call the closely contested race in 2000 between George W. Bush and Al Gore. Its assessment was that the margin in Florida made it too narrow to say who won. It then took 35 days for the Supreme Court to end recounts and effectively give the election to Bush. Markets may hate uncertainty, but even in 2000 there were more important factors at play.

The S&P 500 fell -4% from election night until the Supreme Court ruling in December, but it wasn’t necessarily the election that caused the sell-off. Instead, equity markets were grappling with the bursting of the tech bubble. That could be seen in the returns. The NASDAQ 100 and S&P 500 tech sector sold off by double digits, while other sector declines were much more muted, or in some cases produced gains. 

All market and economic data as of November 2024 and sourced from Bloomberg Finance L.P. and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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