Don’t Let Hope or Fear Over the Elections Drive Your Investment Decisions

The 2024 presidential election is in full swing – with the conclusions of the Republican National Convention and Democratic National Convention, securing former President Donald Trump and Vice President Kamala Harris’ names on the ballot. The two candidates recently took the stage for their first presidential debate, and their economic policies were a key topic of conversation.

As the election continues to intensify, we wanted to summarize the major economic policy proposals of both parties across major categories and assess their potential impact on financial markets over the next 4 years.

Policy Summary

To begin, we’ll take a look at previous policies and draw assumptions and predictions for a potential Harris or Trump presidency:

• Overarching Views
  • A Harris administration would likely be more progressive than the Biden administration, based on her prior tenure as a Senator and limited economic proposals as a candidate, such as grocery price gouging controls and subsidies for new home buyers. 
  • In contrast, a second Trump administration would likely be more business friendly than the Biden administration, taking a more deregulatory approach. 
  • Both candidates, however, share some common political middle ground around their approach to big tech regulation, as well as populist, but economically counterproductive, proposals, such as Harris’ grocery price controls and across-the-board tariffs under Trump.
• Policy Proposals
  • The policy proposals over the next four years will be heavily dependent on the party makeup of the Presidency and Congress. 
  • Even if a single party controls both branches of government, they must prioritize their key economic and non-economic initiatives before the next Congressional elections in 2026 threaten to shakeup partisan makeups once more.
• Tax Cut and Jobs Act (TCJA) of 2017
  • In regard to existing policy: the Tax Cut and Jobs Act (TCJA) of 2017 expires in 2025, with both parties having different views on its fate. 
  • Either extending or renegotiating the terms of the TCJA will be a major legislative event in 2025, with many of the policy differences between the parties being seen as opening bids for these upcoming negotiations over TCJA’s fate.
• Chairman Jerome Powell
  • Lastly, Chairman Jerome Powell’s future at the Federal Reserve is uncertain under either candidate. 
  • Former President Trump has threatened to remove or keep Chair Powell throughout his term, while Vice President Harris voted against Powell’s nomination when she was a senator – further calling Powell’s future into question. 

Financial Market Outlook

Although markets have performed historically well under both Democratic and Republican administrations, strong financial market performance is not a guarantee for either political party. Driven by their party affiliation, most people view the markets and economy as politically polarizing; however, stock market returns were the same under both Obama and Trump at 16% per year. 

Currently, starting valuations on stock and bond markets have a large impact on future returns over longer-term periods (i.e., a 4–8-year presidential administration). Current valuations on U.S. stocks of 21x earnings suggest mid-single digit returns over the next 5 years. 

Depending on the outcome of the TCJA negotiations next year and its impact on corporate tax rates, today’s P/E, future earnings growth, and future returns for U.S. stocks could either be positively or negatively impacted. 

For bonds, history suggests that returns will be driven by current yields. Unless there is an inflationary policy mistake like we saw in the late 1970s and again in 2021 through 2023, today’s bond yields suggest returns of approximately 4.2% for the next 5 years.

Policy Proposals from Candidates and Campaigns

Both candidates and campaigns have released limited details around their economic policy proposals. Former President Trump hit on a few key themes, while Vice President Harris has slowly released proposals since securing the Democratic nomination in August. In certain areas, the campaigns have adopted similar positions when they poll well.

When reviewing the proposals from both candidates, it is important to consider them as opening bids for discussions around the extension of the TCJA next year. Which ideas become law will depend on the outcome of the election, as well as the party composition of Congress. The president will also have more control over certain areas that impact the economy, such as tariffs and federal regulations. 

Former President Trump’s Proposals

• Extend the TCJA, which expires at the end of 2025.
• Lower corporate taxes to 15-20% from the current 21%.
• Raise tariffs 10% on all imported goods and 60% on Chinese goods.
• Eliminate taxes on Social Security payments to retirees.
• Eliminate taxes on tipped wages.
• Expand the child tax credit to $5,000.
• Reduce Federal regulatory burden.
• Increased fossil-fuel energy production.

Vice President Harris’ Proposals

• $25,000 credit for first-time home buyers.
• Grocery price controls via new anti-gouging laws.
• Expand the child tax credit to $6,000.
• Eliminate taxes on tipped wages.
• Raise corporate taxes to 28%.
• Raise capital gains taxes to 33% (28% plus an increased 5% Medicare surcharge) on incomes over $1 million.
• Tax unrealized investment gains on those with a net-worth over $100 million initially.
• Continued support for alternative energy production.

Elections and Financial Markets

During an election year, it is important to keep a few key points in mind:

• There are no crystal balls in investing – and especially during an election, it is even more challenging to predict how the outcome of an election could impact certain policies and their effects on markets. 
• Neither party has a monopoly on good (or bad) stock market returns. 
• Only investing in the stock market if your preferred political candidate or party is in power has a high opportunity cost and can lead to missing out on long-term compounding of assets.
• Valuation, for both stocks and bonds, is a major influence on future returns.
• Economic policies do matter, particularly inflationary policies that can hurt market returns.

For the remainder of this piece, we will dive into some of these points and analyze what they mean for future returns under the next administration. 

Party Affiliation and Views of the Economy and Stock Market

People tend to view the economy and markets through a political lens. Republicans favored the economy more than Democrats under Presidents Bush and Trump; and conversely, Democrats viewed the economy more positively under Presidents Obama and Biden. These views flip-flopped quickly after each election and change of political party in power. 

The below chart from J.P. Morgan Asset Management highlights the change in how Republicans and Democrats viewed the economy over the past 4 administrations. It’s worth noting that S&P 500 returns under both Presidents Obama and Trump were approximately 16% per annum, meaning that if one had sold stocks based solely on their view of either president, they would have missed out on significant returns.

^{Source: Pew Research Center, J.P. Morgan Asset Management. The survey was last conducted in May 2024, “Public’s Positive Economic Ratings Slip; Inflation Still Widely Viewed as Major Problem.” Pew Research Center asks the question: “Thinking about the nation’s economy, How would you rate economic conditions in this country today… as excellent, good, only fair, or poor?”. S&P 500 returns are average annualized total returns between presidential inauguration dates and are updated monthly. Real GDP growth are average annualized GDP growth rates. J.P. Morgan Guide to the Markets – U.S. Data are as of September 17, 2024.}‍

The Importance of Valuation on Future Stock Market Returns

At any point in time, starting valuations matter for future stock market returns. As the scatter chart below demonstrates: the starting P/E ratio of the S&P 500 does not have much predictive value for the next year; and stocks have had good and bad years, regardless of whether they started out cheap or expensive. Over 5-year periods, however, starting valuations are highly predictive of future returns. Cheap stock markets, as evidenced by lower P/E ratios, have generally led to higher future returns. Regardless of which candidate wins this presidential election, today’s P/E ratio of 21x suggests U.S. stock market returns of 5-7%.

^{Source: FactSet, Refinitiv Datastream, Standard & Poor’s, Thomson Reuters, J.P. Morgan Asset Management. Returns are 12-month and 60-month annualized total returns, measured monthly, beginning 7/31/1999. R² represents the percent of total variation in total returns that can be explained by forward price-to-earnings ratios. Price-to-earnings is price divided by consensus analyst estimates of earnings per share for the next 12 months as provided by IBES since May 1999 and by FactSet since January 2022.Guide to the Markets – U.S. Data are as of September 17, 2024.
‍}

Investors always need to make relative choices between asset classes. When P/E ratios on stocks are too high, relative to safer assets’ yields: returns tend to suffer, as investors rotate to the lower-risk assets. Under President Bush’s administration, the stock market had annual returns of -4.5%, as the Dot-com bubble burst in March 2000 at the beginning of his term and resulted in a global financial crisis. In 2001, the S&P 500 P/E ratio started at nearly 22x earnings and fell by nearly half in 2009. At the start of the Bush administration, safe 10-year U.S. Treasuries yielded 5.3%, and at the peak of the Dot-com bubble, the P/E ratio on the S&P 500 was over 25x and the 10-year Treasury yield over 6%. High P/E’s combined with high risk-free bond yields imply poor returns for stocks and good returns for bonds. With 10-year Treasuries yielding below 4% and the S&P priced at 21x earnings, we are not priced in bubble territory.

^{Source: J.P. Morgan Asset Management and St. Louis Federal Reserve. Data as of September 17, 2024.}

What is the Outlook for the Bond Market?

History provides us with a good indication of how bonds are likely to perform under the next president.   Forward returns over a 5-year period are highly correlated with the starting yield in the bond market, as seen by the upward sloping line in the below chart from J.P. Morgan Asset Management, based on data since 1976. Current bond market yields imply returns of approximately 4.2% per annum for taxable bonds during the next Presidency.

It is important to note the two periods where bond returns were meaningfully below the upward sloping line of yields and returns. The periods of rapid increases in inflation and bond yields in the late 1970s and early 2020s – indicated by the orange and purple dots below the diagonal line – led to negative bond price returns, offsetting much of the return of the income from the bonds. If the next president’s fiscal policies or the Federal Reserve’s monetary policy prove to be inflationary and cause interest rates to rise, we are likely to see lower bond returns than implied by current bond yields.

^{Source: Bloomberg, FactSet, J.P. Morgan Asset Management. Returns are 60-month annualized total returns, measured monthly, beginning 1/31/1976. R² represents the percent of total variation in total returns that can be explained by yields at the start of each period. Guide to the Markets – U.S. Data are as of September 17, 2024.}

Should Investors Change Their Portfolios Because of the Elections?

I would not recommend making changes to portfolios based on your expectations or hopes for the outcome of the election. The U.S. stock market has consistently been a terrific compounder of wealth under Democratic, Republican, and split party governance. U.S. stocks and bonds are not the sole assets that investors should consider, although they should make up the majority in diversified portfolios. It is also worth noting that international stocks are approximately one-third cheaper than U.S. stocks. Investors should consider some credit exposure, whether in the public or private markets. Private equity and venture capital can also be an attractive source of returns, particularly if you can access them via a manager that invests through the secondary market.

As always, please feel free to contact your advisor if you have more questions.

Author’s Note:

I began writing this piece in mid-June, as a subsection of my early July note – and realized that it was a topic better served as a stand-alone piece. The focus of this blog is solely on the economic policy proposals of the Republican and Democratic parties and their possible impacts on future financial markets. I realize that people vote for candidates for numerous reasons that matter to them beyond economic issues. My intent is not to sway readers’ votes, only to help frame the issues that matter most in the financial markets.

As I have often written, there is no crystal ball to predict financial markets. The events of the last few months have certainly proven this to be true in politics, as well. If the candidates’ economic policy proposals become more prescriptive as the race continues, I will further update this piece.