Given we are only 8 days away from the US presidential election, I thought I would highlight some key points and then discuss the potential impact on the bond and stock markets.

Key Facts:

• There are 538 Electoral Votes. To become president, you need to win 270 votes.
• Each state has a minimum of three electoral votes with additional votes based on population. Apart from Maine and Nebraska, if you win a majority of the electoral vote, you win the state.
• 43 states have very predictable voting patterns, so it comes down to the 7 swing
• states. These are considered swing states because both Democrats and Republicans have similar levels of support. Swing states include Arizona – 11 votes, Georgia – 16 votes, Michigan – 15 votes, Nevada – 6 votes, North Carolina – 16 votes, Pennsylvania – 19 votes and Wisconsin – 10 votes. 93 electoral votes in total.
• If we assume that the 43 states with predictable voting patterns vote as expected, in the swing states Democrats will need 44, while the Republicans will need 51 to secure victory in the 2024 election. According to our research, Pennsylvania has emerged as the most important battleground state.
• In 2020, the difference in vote count in the swing states was a mere 21,641.

Difference in Key Policy Areas and impact on inflation, Interest Rates and Stock Markets:

Donald Trump:

• Republicans plan on extending the tax cuts that were announced in 2018 (set to expire in 2025) and introducing further tax cuts on social security payments and on overtime income. This will be offset by tariffs. Former President Trump plans on placing 10% tariffs on goods from all countries and over 50% from China. Although the tariffs will help offset some of the tax cuts, it may not be enough. It is expected that this will result in adding roughly 7 trillion dollars to US Debt over the next 10 years.
• Tariffs are inherently inflationary as they raise the price of goods in the US. Inflation has just come into the target range for the US Federal Reserve. Tariffs may accelerate inflation in the coming years making the task that much more difficult for the FED.
• Immigration policy including closing off the border and deporting illegal immigrants will put pricing pressure on certain industries reliant on that labour.
• Stock markets welcome any tax cuts as it improves corporate earnings. That, combined with further tax cuts to individuals on social security, will help consumption. Republicans also favour less regulation which is good for financial stocks, technology companies, and commodity producers.
• Long-term interest rates may go up as investors may demand a higher rate for holding long US Treasuries when their debt is climbing at a rapid rate

Kamala Harris:

• Democrats plan to let the tax cuts announced in 2018 expire in 2025. In addition, they plan on raising taxes on high income earners. Currently, the Democrats are running a trillion-dollar deficit a year. Under Vice President Harris, it's calculated that debt would go up by roughly 3 trillion over the next 10 years based on their plan to expire the tax cuts in 2025 and impose new taxes on individuals earning over $400,000.
• The Democrats are also planning on having more stringent immigration policies which impact labour cost, but to a lesser degree than the Republicans. Again, this is inflationary.
• Stock markets could initially be disappointed under a Harris victory. Higher taxes tend to coincide with slower growth, which is never good for equities. The current administration has frowned upon large mergers and has attempted to regulate technology companies. I suspect that this would continue if Kamala Harris won the presidency.
• Long bond rates may continue to climb although at a slower trajectory than under the Republicans. Higher taxes mean more revenue for the government which appeals to government bond investors.

The current national polling numbers are showing that the Republicans are ahead 53-47. Unfortunately, these numbers are within the margin of error meaning that the election is too close to call. However, it seems that over the past few weeks the movement in the stock and bond market has been pricing in a Trump victory.

How the markets respond after the vote will depend on the outcome of the election and the division in the House and Senate. Bond and stock markets tend to like the scenario where neither party has control of both arms of government. If Harris wins, expect the stock market to sell off and long-term interest to possibly come down a bit. If Trump wins, the response in the stock market will depend on a split or divided congress and senate. If the election does not have a clear winner, that could cause trouble in the markets. Buckle up.

Speaking of elections, my daughter Maya had her first opportunity to vote in the recent BC Provincial Election. This has been something she has talked about wanting to do for quite some time. I suspect having an older brother who has been able to vote for several years now had something to do with her desire to “have her turn”. Regardless, we applaud that she took her civic duty so seriously. After we voted, I asked her how she came to decide who she voted for. She said it was hard, but ended up voting for the one she disliked the least. Quite a statement from our future generation.

Regards,

Ashit