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

The S&P 500 dropped -1.8% this week, and it turned October gains into losses—the first negative month in the last six.

This week, data showed that the U.S. economy continued to expand at a strong pace in the third quarter. GDP grew at a 2.8% annual pace for the period. Consumption was particularly strong, growing 3.7% (versus consensus estimates of 3.3%). Consumption saw a big boost from the goods sector, and it seems that a big standout was non-durable goods (autos, household furnishings and recreational items).

The strong economic data pushed yields up. The 2-year (4.15%) is up 5 basis points (bps), and the 10-year (4.28%) has risen 4 bps.

It was also the busiest earnings week of the Q3 season. Apple (+1.5%) and Amazon (+7% pre-market) reported last night, while Google, Meta and Microsoft all reported earlier in the week.

In commodities, dissipating geopolitical risk catalyzed a -3.8% drop for crude oil.

While it was a busy week in macroeconomic and corporate data, investors seemed distracted by the U.S. election. 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 revert higher, and it would 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.

Even now, we are focused on tax efficiency across portfolios and asset location in an effort to mitigate tax impact. This could become even more important after 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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