US election: The divided States of America

The ideological landscape in the US is witnessing a deepening divide between conservatives and liberals. The Republicans are becoming increasingly conservative, whilst the Democrats' liberal position has remained relatively consistent. Though Donald Trump may be amplifying this divisiveness, this ideological split has roots dating back decades.

A crucial factor contributing to this ideological divergence is the increased government involvement, particularly following the Nixon shock. In 1971 the US Government decoupled the dollar from gold, which allowed governments to increase the amount of money they could borrow. Before the shock, total US Government debt stood at 35% of GDP in 1970,¹ however, it has subsequently skyrocketed to 120% by 2023.² This expansion has led to a surge in regulations, evident in the Federal Register, the official journal of government rules, growing from 20,000 to 90,000 pages over the past 50 years.

As the election unfolds, investors must consider the potential implications of these long-standing ideological differences on policy decisions and the impact on financial markets.

With 538 Electoral College votes up for grabs, securing 270 votes becomes the focal point for candidates claiming the White House. The key battleground for the presidency is across the crucial swing states and the latest opinion polls suggest Donald Trump is leading in pivotal states like Arizona, Georgia, Michigan, and Nevada, indicating a potential advantage. President Joe Biden's slight lead in Pennsylvania and a tie in Wisconsin suggest that, overall, Trump is currently ahead in these swing states.

National polls do not favour Biden either. In the year leading up to the election his approval rating is still below all other candidate’s going back to Jimmy Carter in 1979. Factors such as Biden's handling of immigration may contribute to his low level of popularity. His policies, including immigration reform, which provides a pathway to citizenship for undocumented people, have led to a massive rise in illegal migrants. This has become a significant issue in Texas and other states (including ones governed by Democrats).

Secondly voters' perception of inflation matters. History suggests it will play a decisive role in shaping the electoral narrative, with Biden’s track record potentially going against him. However, this is being offset by the Democrats’ more supportive stance for woman in relation to abortion laws in the US. The Democrats want to restore nationwide abortion access.

With all the seats up for election in the House of Representative, opinion polls are unclear on which way it will go. The Senate, where roughly a third of seats will be up for election, could go to the Republicans, although it is quite tight. So, it is the presidency in the White House, that could be critical as their Vice President has the casting vote (in the event of a tie) in the Senate.

Analysing the rhetoric of candidates Donald Trump and President Biden uncovers key differences that may impact financial markets. On fiscal matters, the extension of some tax cuts, which expire in 2026 could be one of the first things to deal with. However, in the absence of a recession, we don’t expect it to be a significant area of contention in 2024.

In foreign policy, the candidates diverge on polices for Ukraine and Iran. Trump has an isolationist stance and is sceptical of supporting a distant country when “American parents are struggling to even feed their children.” In contrast Biden is very supportive and has requested around $60bn in military and non-military aid from Congress for Ukraine. With regards to Iran, Trump is more likely to tighten restrictions, whilst Biden has previously favoured negotiations, although this seems to be changing.

Trade tariffs are another area where the candidates diverage, both have an “America First” rhetoric but go about this in a different way. Biden takes the approach of providing greater supply of subsidies as demonstrated by the CHIPS Act (Creating Helpful Incentives to Produce Semiconductors), whilst Trump is proposing a universal 10% tax on all imports.

These differences in defence spending and trade tariffs all hold implications for investors.

Investors should closely monitor three strategic themes based on potential election outcomes.

Firstly, Trump's potential re-election may favour oil and gas companies as he looks to increase the supply of fossil fuels and favours fewer environmental restrictions, while Biden's focus is on clean energy and his pause on new approvals of Liquified Natural Gas exports could favour the renewables sector.

Second, the aerospace and defence sector might suffer if Trump limits spending on supporting Ukraine, whereas Biden has been keen to provide financial support to the country.

Third, the uncertainty of trade tariffs could impact sectors differently. Trump in his first term introduced a raft of tariffs and could well do so again. Due to their more isolated nature, the IT sector along with the consumer discretionary sector, could potentially benefit from any increase in trade tariffs. Between 2017 and 2019, the last period of elevated trade tariff uncertainty, the IT sector returned over 8% per annum (see chart below).³ While globally emerging markets and the UK might face challenges with their greater international focus.

Even without an election there’s always a risk that investments can go down in value. However, the election introduces uncertainties for investors, both in the run up and after the result is announced. Trump is facing numerous court cases and questions around the legality of him standing for office.

He was initially banned from the ballot in Colorado, which was contested in the Supreme Court and resulted in it ruling that he could remain on the ballot. There is a risk that any of these court cases going against Trump could lead to social unrest, as exemplified by the Capitol Hill riots.

There is a standoff building in Texas, where the Governor, Gregg Abbott, has instructed state troopers to put up barbed wire to stop immigration putting him in direct opposition to President Biden and the Supreme Court. He is being supported by 25 Republican governors and it will come to a head with either Texas and the Republicans or President Biden and the Democrats backing down.

Post-election, the risk is a tight result - especially given that this could be a repeat of 2020 when Biden won by only 44,000 votes across three key states in the Electoral College voting system. A landslide victory for either side should help the opposition candidate accept the result. This is probably the best outcome and would avoid any disputes. It would help with a smooth transition of power, which is crucial.

As the 2024 US election unfolds, investors face a multifaceted landscape shaped by historical ideological divides and candidate positions.

Navigating these complexities requires a keen understanding of swing state dynamics, policy implications, and the potential risks that could impact financial markets. As the nation awaits the election results, investors must remain vigilant, ready to adapt their strategies to the evolving political and economic landscape.

[1] US Refinitiv Datastream/Evelyn Parnters

[2] Federal Reserve Bank of St. Louis; November 2023

[3] Refinitiv Datastream/Evelyn Partners.