The Presidential Election Playbook

As we often remind ourselves, the economic backdrop has tended to be the dominant driver of market returns – with bouts of volatility around political events proving short-lived. We don’t expect this time around to be any different.

However, that doesn’t stop market participants from getting their own bets on as the elections odds swing.

That is exactly what we have seen over the last couple of weeks. As the odds of a Republican White House have risen, there has been some textbook “Trump trade” dynamics playing out:

• Small- and mid-cap stocks have outperformed their large-cap peers on hopes of lower taxation and deregulation.
• U.S. Treasury yields have jumped some 40-50bps across the curve on the expectation that tariffs, lower taxes, and anti-immigration laws will be inflationary and keep the Fed on the cautious side.
• The dollar has gained from recent lows alongside the surge in bond yields.

The point around currency has been of particular interest given that the Republicans have clearly expressed their desire for a weaker dollar to support trade dynamics. 

As we discussed a few weeks ago, it is starting to feel as though we are on the verge of a weaker dollar regime. That view for a weaker dollar over the medium term is also something that our recently published 2025 Long-Term Capital Market Assumptions reference.

That is likely to be the direction that the market moves in under a Democratic victory. But we think that things could look at little different under a Republican victory.

Despite the Republican party’s desire to weaken the dollar, their policies are likely to have the opposite effect in our view. We continue to see tariffs and fiscal policy as the main drivers for global currency markets. More government spending and universal tariffs could pave the way for an extended period of “U.S. exceptionalism” to drive U.S. interest rates and the dollar higher. That is what history tells us from 2016 and 2020, too.

That initial dollar strength under a Republican victory would likely be concentrated against the likes of the euro and Chinese renminbi given the direct growth impact on both economies from tariffs. For the euro, our estimates suggest that the economic impact of tariffs could weaken the currency by 3-4% against the dollar in the weeks following the election – particularly if the recent weakness we have seen in Europe persists.

Although the dollar likely outperforms most peers under a Republican sweep, other safe haven currencies like the Swiss franc and Japanese yen would likely be supported. The Swiss franc in particular was the top performer during the 2019 trade war, and tends to perform well when the European economy is weak. Similarly, the British pound’s services-based economy could provide some insulation against tariff risks – particularly if the UK Budget is perceived positively by the market.

While we think that a strategic asset allocation is the dominant driver of long-term returns, considering other tools like currency allocations to position for different election outcomes can help portfolios to perform across a range of outcomes. Taking our FX diversification framework as a starting point, one might consider reducing their euro exposure relative to this benchmark in the lead-up to the elections in favor of Swiss francs or British pounds for a greater certainty of outcome. That can help to lower the currency impact on portfolio returns.

Please reach out to your J.P. Morgan team if you have any further questions on elections and your portfolio.