Published on: November 12, 2024
It’s no secret that political headlines tend to trigger short-term reactions throughout the markets. Although emotional reactions and uncertainty can trigger irrational market responses in the short run, it’s worth noting that market returns are determined by fundamental drivers such as economic growth, inflation, interest rates and corporate earnings rather than by a single presidential election. Political promises influence these fundamentals to a much lesser extent than we would expect.
In the wake of the U.S. elections, let’s review a few factors that need to be considered in order to put the impact of the results into perspective.
Election promises are not cast in stone
Election promises are presented to the public as a means to guiding policy. As such, they raise hopes to convince voters to choose a party on the ballot, but the election of a president does not guarantee the implementation of said policies.
The Congress also plays a decisive role in enabling the President to implement his agenda. Even in the case of a one-party sweep of the presidency and Congress, there is no guarantee of harmony and agreement within a single party. The economic context can also distort a party’s agenda, or non-economic issues can become more pressing.
Markets don’t care much about the elected party
Historically, markets have experienced strong periods under both administrations. Moreover, earnings growth and valuations clearly have a far greater influence on equity performance than the election of a head of state.
As with the equity market, the President does not control the bond market either. The main drivers of bond yields include monetary policy, interest rates and inflation.
Monetary policy has the final say
As previously noted, over the long term, returns seem to be determined more by the fundamentals of the underlying asset classes than by the outcome of an election. Historically, presidents have been heavily reliant on monetary policy conditions to implement their policies.
Despite all the attention paid to the executive branch, one could argue that it is U.S. monetary policy that matters most. Moreover, issues related to public sector debt could also influence the longer term portion of the yield curve.
Investment opportunities arise in any political context
Opportunities for innovation and investment will persist, regardless of the political context and the outcome of the election. Mindful of the importance of economic growth, governments have always injected public funds into R&D in various forms. Investors should pay more attention to the ability of business leaders to harness new business opportunities than to the political sphere.
A word on Trump’s tariffs
In recent months, Donald Trump has been particularly vocal about imposing tariffs on U.S. trading partners. He has made it clear that he wants to impose a 60% tax on Chinese imports and at least a 10% tax (best-case scenario) on other trading partners. The aim of this pledge is to boost production in the U.S. manufacturing sector, but it fails to take wider economic repercussions into account.
By drastically impacting consumption growth, such tariffs from the Trump administration would also jeopardize the economic cycle. If the President-elect relies on the effectiveness of his economic policy, as it has been the case in the past, he is aware he must avoid fuelling inflation by raising prices. This is another example of the precarious nature of election promises mentioned earlier.
Conclusion
Keep in mind that the election’s influence on the economy is often overstated, as fundamental factors such as earnings and valuations are more significant than political rhetoric. Investors should therefore base their decisions on proven fundamentals and look through the short-term market reaction to electoral results that distract from sounder analysis.