Election Day

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Tonight, millions of Americans will cast their vote to decide the next four years in American politics. And if we can trust news coverage, it’s likely to be a close race, with many ‘swing states’ such as Pennsylvania still fully in play. 

In the recent weeks, many clients asked us what they could expect from either outcome, and how they should adjust their portfolios for it. In today’s newsletter, let’s try to cover three things: What could happen, what (likely) will happen, and what should happen.

What Could Happen

From a Republican point of view, a Harris presidency means socialism. From the Democratic point of view, a Trump presidency means facism. But what can we really expect? 

This year’s election was more focused at flinging insults at the other party, rather than focusing on actual policy. Nevertheless, we can try to take a look at a few of the key areas that may be most relevant to our investment portfolios.

Starting with the key question of taxes. Trump signed a major corporate tax rate cut (from 28% to 21%) back when he was President in 2017. He plans to renew, and ideally expand, this tax cut to just 15%. Harris, on the other hand, does not want to renew the tax cut, which would see the tax rate raised from 21% to 28%.

On the topic of trade and tariffs, Harris shares the views of current president Joe Biden, which looks to boost domestic competitiveness with China through tariffs and export controls. Trump wants to go aggressively further, having gone as far as looking to raise tariffs so high that he could abolish income tax on Americans. 

And lastly, inflation. Inflation has been one of the key themes of this year’s election, as many families in the lower and middle class struggle to keep up with their significantly higher lifestyle expenses after last year’s inflation spike. Harris looks to tackle the problem through direct aid to the lower and middle classes, for example through tax cuts, aid for first-time homebuyers, and stronger efforts to combat price gouging. Trump, on the other hand, sees the biggest opportunity in energy costs, which he wants to tackle by (re)expanding and deregulating oil and gas drilling restrictions, and of course, deregulation across industries in general. More importantly, he wants to take stronger control of the federal reserve, and the interest levels he sets.

Those are the policies - how can we expect them to affect our portfolios?

For public equities, the impact of either outcome is hard to forecast. Either candidate leans towards protectionism, i.e. higher tariffs and import restrictions, which might hinder demand and thus sales growth, but could also move demand from foreign companies to US-based businesses. The most direct impact might result from the change to the corporate tax rate.

For bonds, a stronger US dollar over the short term seems likely. That might be especially challenging for countries with substantial amounts of USD-denominated debt, as is the case for many emerging markets. Over the long term, both candidates seem to be more active in spending on government policy rather than cutting back on expenses and/or raising taxes - which brings up the commonly mentioned doubts about the US’ long-term ability to repay their debts, and thus, inflation, which might positively affect real assets (i.e. real estate, infrastructure) and commodities.

So what impact could you expect on your portfolio?

If you are a Euro-denominated investor with a globally diversified portfolio (i.e. equities invested in a broad index such as MSCI World), short-term impact might actually be positive. A stronger USD means that your (likely significant) allocation to US stocks should see an FX-induced increase in value amid a stronger US dollar. Despite challenges such as non-cheap valuations, the US equities market continues to be the most resilient, especially when comparing it to other equity markets, such as Europe, which struggles amid continued slow growth and the Ukraine War on its borders, or China, which only recently revived itself thanks to massive government stimulus.

In the words of the Investment Strategy Group at my “alma mater” Goldman Sachs: If you are currently invested in-line with your long-term, strategic asset allocation, it likely makes the most sense to just stay invested. The only exception I would make to this is to any election-unrelated tactical trade, or in general, large single stock positions you might be invested in. The election and subsequent weeks are likely to be periods of high volatility. It’s in such days that your otherwise correct trade idea might suffer due to politically induced market swings, and hence, I personally prefer to reduce the risk in my personal, tactical portfolio, or even to hedge individual positions. (And of course, be mindful of wanted and unwanted Concentration Risks in US stocks.)

But that is all based on what could happen. What wilI happen?

What Will Happen

You might be very surprised, but I don’t have a crystal ball to forecast what will happen tonight. (In that case I’d probably not be writing this newsletter, but get ready to retire on my private island.) But I still feel confident to give an assessment of what is likely to happen after the election is done. And that is… surprisingly little.

With that, I mean, the big differences between what policy actions were promised during the presidential race, and what has actually happened. Let’s look back at the last two Presidents:

Trump promised a border wall on the Mexican border, paid for by no other than Mexico. According to the BBC (back in 2020), only 15 miles of additional ‘primary barrier’ were actually built, bringing the total to 669 miles, with another ~400 miles in construction. A significant number, but still short from his promise of building a concrete wall along the entire 2000-mile-border. Admittedly, Trump was much more effective in his aforementioned corporate tax cut, and also made significant moves against the US’ biggest ‘competitor’, China, especially in regards to national security (i.e. banning Chinese drones and Chinese telecoms from selling in the US).

Biden promised significant public spending through his ‘Green New Deal’, and did indeed make it a reality through the Inflation Reduction Act. However, the positive impact of the Act was (at least politically, in my view), overshadowed by the ongoing, significant increases in prices (aka inflation) despite the IRA, mostly affecting lower- and middle-class citizens. Biden also had to deal with numerous geopolitical crises, such as the ongoing war in Ukraine and the turmoil in the Middle East. He also failed to significantly follow through on his efforts to cut, if not entirely forgive, student loan debt.

And going forward, no matter if Trump or Harris wins, I expect the outcome to be the same. There will be many promises from both sides that will likely run into challenges as they hit the many turmoils of US politics and the way how legislation is actually made. Some will pass, some will not. Even the strictest rhetoric during their respective campaign might weaken, or vanish entirely, once either candidate is elected president. 

Look at the recurring topic of the carried interest loophole. The carry (i.e. performance fee) that an asset manager receives is treated as capital gain (typically taxed at 20%) rather than income (taxed at up to 37%), something that has long been a thorn in the side of democratic candidates. Biden even mentioned that he wanted to close this loophole in March of this year, but actual, actionable measures never came around. Even the UK’s labor government, which had significantly pushed for a similar tax break to be abolished, ended up only increasing the tax on performance fees from 28% to 32% - rather than the top income tax rate of 45%. 

Maybe it’s lobbying, maybe it’s the challenge in turning ideas into actual law, maybe it’s just the truth that there’s no definite connection between what politicians say and what politicians do - in general, simply less happens than they say they will.

And what about public markets? If we can trust the historical data, it doesn’t even matter that much at all, or at least, there’s no visible pattern - they still go up, over the long term.

What Should Happen

I find it harder and harder to not be political in my work and in my content. Today’s day and age seems more and more like a time where civil engagement takes shape also in showing what political causes you support, that being especially true for civil rights - think free elections, a free press, same-sex marriage, equal rights for women and other minorities, and so on. (If anything, it is shocking that there are parties today, still and again, that are opposed to all or some of these measures.)

As outlined in the prior section, I think that the outcome of the election will either cause surprisingly little impact on the next four years of economy and public markets, or it will cause a notable impact that ends up being overshadowed by events outside of the control of either president-to-be. So from the financial perspective, politics is something that I personally would advise you to lose little sleep about, although it is admittedly a source of common frustration when I read yet another stupid idea or simplification from a politician of either party, country, or party.

So what do I think should happen?

No matter the outcome of the election, I hope for a decisive outcome - meaning a clear victory for either candidate, with little room for argument or discussion in the next week. I know that is very unlikely, especially as contesting the vote seems to have become a clear strategy of any election and party. For all of our mental health, it would be best if the outcome is so clear that there’s little room for debate. 

And secondly, and much more importantly, a return to reason. Once again, a very unlikely thing to happen, as parties have realized that memes, insults and oversimplifications are better ways to win voters than boring policy. But take a look into recent history, and get a little glimpse into what we lost: I personally remember the 2012 election of Obama vs. Romney to be extremely controversial - remember Romney’s statement dismissing 47% of the country as people who ‘pay no income tax’. But with that in mind, just compare the 2012 and 2024 presidential debates: While Trump and Biden just throw insults at each other, Obama and Romney greet each other, agree with each other, and most importantly, respect each other. Something that we’ve not seen in this campaign, Trump was even surprised that Harris went to shake his hand at the recent debate.

Perhaps it’s an unrealistic wish. I know for certain that I am not the only one who would love a return to boring, rational politics. Let’s see who makes the race tonight - and let’s hope that no matter the outcome, calmer heads prevail.

Just one thing remains to be said:

God Bless America. 

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