With two weeks to go until the US presidential election, financial risk managers are again faced with a quandary of uncertainty. Regardless of the outcome, there will be significant changes to government spending, climate policy, the labor market, healthcare reform, tax policies, foreign trade, technology and innovation. These shifts will have major implications for financial markets, particularly when they concern foreign trade, fiscal policies and interaction with the central bank’s monetary policies. Amid the uncertainty, financial risk managers in every market should have already begun to prepare.
RiskSmart clients run billions of stress tests per month. Below we outline some of the US election related scenarios RiskSmart users can input into their stress test engine to shock their portfolios and those of their clients to prepare for the unexpected.
Equity Markets
President Harris
Harris would likely continue a progressive economic agenda, focusing on social welfare, climate change, and labor rights. Her presidency could mean an increase in corporate regulation and potentially higher taxes on wealthy individuals and corporations. This may lead to market volatility, as sectors like energy, healthcare, and technology could experience increased scrutiny. However, clean energy and green technology sectors may benefit from a progressive policy for climate change and could see significant growth. Companies involved in renewable energy, electric vehicles, and sustainable infrastructure could attract investor interest as they align with Harris’s focus on reducing carbon emissions and promoting green jobs.
President Trump
Trump’s previous term was marked by significant tax cuts, which were well-received by the stock market and corporate America, boosting corporate earnings and stock buybacks. A second Trump presidency would likely bring tax cuts, deregulation, and a continuation of America-first trade policies. We might see a rally in traditional energy, manufacturing, and defense stocks. However, a repeat of Trump’s tariffs and confrontational trade stance, especially with China, could introduce volatility in global supply chains, potentially affecting companies with significant international exposure. Overall, stock investors might respond favorably to lower taxes and deregulation, though volatility could rise if trade tensions escalate.
Monetary Policy – Interest Rates and Inflation
President Harris
Harris’ policies may involve significant government spending on social programs and infrastructure, which could exert upward pressure on inflation and interest rates. If inflation concerns persist, the Federal Reserve may respond by tightening monetary policy, potentially raising interest rates to prevent the economy from overheating.
Additionally, if Harris increases taxes on corporations and the wealthy, the need for borrowing could be moderated, which might lessen upward pressure on interest rates. However, if spending levels remain high, markets may anticipate higher rates as a response to potential inflation.
Harris’ approach to significant social spending and investment in green infrastructure could stoke inflationary pressures, especially if wages increase in line with her advocacy of stronger labor protections. If these inflationary pressures are deemed persistent, the Federal Reserve may raise interest rates to maintain price stability. The emphasis on climate policies might also lead to higher short-term costs in the energy sector, as fossil fuels are phased out more rapidly. This could create short-term supply constraints, driving energy prices higher and adding to inflation concerns.
President Trump
Trump has historically favored low-interest rates and has been vocal about the Federal Reserve’s role in supporting economic growth through accommodative policies. A second Trump presidency might see a push for lower interest rates or even the reintroduction of unorthodox monetary policy measures, especially if economic growth falters. If Trump were to influence the Fed’s policies indirectly, we might see more dovish policy leaning towards lower rates, which could stimulate short-term growth but increase long-term inflation risks. Bond yields could be affected by the anticipation of lower rates, leading to potential declines in yields as investors price in prolonged accommodative policies.
Trump’s policies might focus on supply-side measures, such as tax cuts and deregulation, to stimulate economic growth. While this could increase disposable income and consumer spending, inflation may become a concern if demand outpaces supply, particularly in manufacturing and traditional energy sectors. Trump’s protectionist stance on trade, including tariffs on imports, could also raise prices on imported goods, contributing to inflationary pressures. If tariffs are reintroduced or expanded, consumer goods may become more expensive, especially electronics, vehicles, and other products with complex international supply chains. However, Trump’s likely push for lower interest rates could offset inflation concerns in the short term, though it might amplify them in the long run.
Bond Market and Government Debt
President Harris
With anticipated increases in government spending on infrastructure, healthcare, and social welfare, a Harris’s presidency could lead to higher federal deficits and increased issuance of government bonds. This could result in upward pressure on bond yields as the supply of debt rises to finance these expenditures. If inflation becomes a concern, real returns on bonds may decline, potentially making bonds less attractive to investors. However, if Harris’ proposed tax increases on corporations and high-income earners help balance some of the spending, this could mitigate the impact on debt levels, potentially stabilizing yields.
President Trump
Trump’s administration might see an expansion of debt-financed tax cuts and spending on defense and infrastructure. This could lead to higher government borrowing, potentially increasing bond yields if investors demand higher returns to offset increased risk. However, Trump’s focus on economic growth and his inclination towards influencing the Federal Reserve for lower interest rates could suppress yields in the short term. If markets anticipate higher inflation due to deficit spending and loose monetary policy, long-term bond yields could rise as investors seek compensation for increased inflation risk.
Currency Markets and the US Dollar
President Harris
The U.S. dollar might experience mixed impacts. On one hand, higher government spending could contribute to a weaker dollar as fiscal deficits increase. On the other, if Harris’ administration adopts a more globally cooperative trade stance, it could strengthen the dollar relative to other currencies by restoring investor confidence in the U.S. economy. A weaker dollar could benefit U.S. exporters and make American goods more competitive abroad. At the same time, that could result in increased import costs, potentially adding to inflationary pressures.
President Trump
Trump’s America-first policies might put upward pressure on the dollar as tariffs and trade tensions reduce reliance on imports. A return to trade conflicts, particularly with China, could lead to a stronger dollar as global markets seek safe-haven assets amid uncertainty. However, if Trump pushes for lower interest rates, this could weaken the dollar over time, especially if other central banks raise rates to combat inflation. A stronger dollar could hurt U.S. exporters, while a weaker dollar might increase inflationary pressures domestically due to higher import costs.
One thing is certain: It is time to prepare for the unexpected
Regardless of their political leanings, financial risk managers must consider all outcomes.
A Harris administration may focus on progressive policies with increased regulation and spending on social and environmental issues, leading to potential market volatility and a focus on green energy and technology sectors. Higher government spending could raise inflation concerns and drive up bond yields, while higher taxes might weigh on corporate profits.
A second Trump administration would likely prioritize deregulation, tax cuts, and protectionist trade policies, potentially supporting traditional energy, manufacturing, and defense sectors. Lower interest rates could stimulate short-term growth but might lead to longer-term inflation and currency volatility.
