Following the conclusion of the Republican National Convention, the contours of the 2024 presidential and Congressional elections are coming into clearer focus. To be sure, considerable uncertainty exists about the Democratic presidential nominee, which depending on how matters evolve, could still significantly change the 2024 electoral calculus.
Nevertheless, given the dramatic events of the past few weeks—a poor first debate for President Biden, a failed assassination attempt against candidate (and former president) Trump, and a unifying Republican convention—public opinion polls and political futures markets are suggesting that a Republican “clean sweep” is possible. A clean sweep will occur if the “Grand Old Party” (GOP) wrests back control of the presidency and a US Senate majority, while maintaining its majority in the House of Representatives.
We feel it is worth sharing our views on the investment implications of a GOP clean sweep. That discussion is warranted not just because of what may ensue following the November 5 election, but because market moves in the coming weeks and months could be significantly influenced by expectations for Republican control of Washington in January 2025.
Clean sweep: policy implications
There was a time when a national party convention unveiled a detailed platform, outlining policy priorities. That is far less true these days, and especially for the Republican Party of 2024.
Nevertheless, based on public statements by candidate Trump, vice presidential nominee JD Vance, and the writings of advisors and think tanks close to the campaign, it is possible to draw broad conclusions about the likely direction of economic, regulatory, financial and international policies that would ensue if Republicans regain control of the executive and legislative branches of government in Washington as of January 2025.
The cornerstones of GOP domestic economic policy will include a complete extension of the 2017 tax cuts (some of which are due to expire at the end of 2025), reductions in various forms of government regulation of business (with strong support from the US Supreme Court decision earlier this year that sharply curbed the regulatory powers of administrative agencies), and a partial reversal of federal government support for alternative energy.
While difficult to quantify at this juncture with precision, those policies (particularly light-touch regulation) are apt to raise earnings expectations for a variety of companies across various sectors and industries. Accordingly, expectations of a clean sweep are likely to be accompanied by further gains in US equities (on top of those already made this year), as well as support for (already tight) credit spreads.
What is less clear is how Republican control of Washington will impact federal government deficits and debt levels, and US Treasury yields. Nothing in the platform or public pronouncements indicates clear plans to reduce government spending, much less to increase taxes. Nevertheless, it does not necessarily follow that lax fiscal policy will necessarily lead to higher bond yields. To the extent that inflation continues to decline, and US growth slows (due to the lagged impacts of Fed tightening), bond yields could fall even if little is done to address large US federal government deficits.
Two other policy areas are worth considering as part of a Republican clean sweep: Immigration and tariffs.
On immigration, Trump and the GOP are vociferous advocates of slowing or even reversing net immigration into the United States. To the extent that objective is realized after 2025, its economic impact is likely to slow trend growth in the US by creating labor shortages. That impact, however, is likely to be a long-term corrosive on US potential growth, yet without significant near-term impacts on capital markets (due to its slow-moving nature).
Trump and his party are also staunch proponents of imposing new or higher tariffs on imports, potentially across products from many countries and regions. High tariffs are unlikely to have any positive impacts on US investment or employment and should instead be seen as unambiguously detrimental to long-term US economic activity. Higher tariffs could also boost prices and hence measured inflation, even if their adverse impacts on business and consumer demand (due to falling purchasing power) are ultimately deflationary.
In sum, a clean sweep is likely to usher in much for investors to like, above all the profit-enhancing benefits of lower taxes and less burdensome regulation. However, to the extent that the GOP policy reverses immigration and raises tariffs, some of those gains could be significantly impaired over time.
Clean sweep: investment implications
What, then, are the key investment implications of a clean sweep?
First, to the extent that markets begin to discount a clean sweep soon, markets will move well before election day. Investors who share conviction about a clean sweep will therefore want to adjust portfolios now, rather than waiting for the election results.
Second, equity and credit markets are likely to broadly welcome a clean sweep, insofar as the likely GOP policies are apt to be profit-friendly, at least initially.
Third, it would be wrong to conclude that a GOP that shows little interest in deficit reduction will negatively impact the US Treasury market. US Treasury yields are more likely to respond to growth and inflation outcomes (and Federal Reserve policy responses), than to the medium-term prospects for deficits and debt.
Fourth, sectors where regulatory burdens will be eased are most likely to benefit from a clean sweep. Broadly, those sectors include health care, finance, oil and gas exploration, as well as those industries facing significant labor or environmental oversight (e.g., basic materials, agribusiness or industrials).
Fifth, some sectors that have benefited from the Biden administration’s push into alternative energy (via the misnamed Inflation Reduction Act) are likely to be net losers from a clean sweep. Among them are solar and wind producers of alternative energy and electric vehicles.
Sixth, to the extent that a clean sweep implies sharp reductions in immigration and significant new (or higher) tariffs, the long-term outcome will be slower US trend growth. Among others, that outcome would result in lower real interest rates and, eventually, to diminished corporate profitability (as access to lower cost global labor supply and imports is curtailed).
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal. Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Changes in the credit rating of a bond, or in the credit rating or financial strength of a bond’s issuer, insurer or guarantor, may affect the bond’s value. Equity securities are subject to price fluctuation and possible loss of principal.
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