ATTILA KADIKOY: How Harris and Trump could shape market trends

Today’s US presidential election presents two distinct economic paths under either Kamala Harris or Donald Trump, each with varying implications for markets across different time horizons. Based on their previous policy approaches and stated intentions, we can analyse the likely effects on the markets of each candidate’s victory while setting aside political preferences.

Short-term outlook — Trump’s market advantage

The markets would greet a Trump victory more positively in the immediate aftermath of the election. This assessment stems from Trump’s established market-friendly approach during his previous administration and his commitment to maintaining lower tax rates. The market’s familiarity with Trump’s economic management style and consistent stance against tax increases would be likely to provide investors with immediate confidence.

In contrast, a Harris victory might initially generate more muted market reactions. The primary concern centres on the Democratic platform’s proposed tax increases, mainly targeting corporations and high net worth individuals. These potential tax hikes could hit corporate earnings, creating initial market hesitancy.

Medium-term prospects — Harris’ sustainable approach

The medium-term outlook shifts in favour of a Harris administration, primarily due to the sustainability of Democratic economic policies. While Trump’s proposed policies might appear market-friendly at first glance, several factors could prove disruptive over time.

A key concern under a Trump administration would be his stated intention to significantly increase tariffs. He has said he will impose across-the-board tariffs of up to 20% and as much as 60% on Chinese goods. A Federal Reserve study found that in the short-term, the effect of Trump’s 2018 tariffs was higher prices and that the small boost to protected firms was outweighed by higher input costs and retaliatory measures.

While tariffs themselves are neither inherently positive nor negative, their economic effects could be substantial. Higher tariffs would probably contribute to consumer inflation through two mechanisms: imported goods would become more expensive for consumers who maintain their preference for these products; increased demand for domestic alternatives would drive up prices of locally produced goods.

These tariffs would in effect function as a consumer tax, as the costs are passed through to the end consumer. In addition, Trump’s relationship with the Federal Reserve could pose significant risks. The former president’s previous tension with the central bank suggests potential conflicts if economic data doesn’t align with desired rate cuts. The most severe risk would be attempts to influence or compromise Fed chair Jerome Powell’s monetary policy independence.

In contrast, a Harris administration would be likely to maintain a more hands-off approach to Fed independence, providing stability to monetary policy implementation. The Democratic economic agenda appears less likely to generate inflationary pressures, offering a more stable medium-term outlook for markets.

Long-term considerations — the looming government debt question

The long-term economic outlook under either administration will largely hinge on their approach to managing the substantial US government debt. US government debt amounts to $35-trillion — the equivalent of 6% of GDP.

Christian Dery, head of macro strategy at Capital Fund Management, predicts that a Republican win could increase the deficit by roughly $500bn or 2% of GDP. The University of Pennsylvania puts that at $4.1-trillion over the next decade. 

While the debt ceiling is likely to be raised regardless of who wins the presidency, the candidates’ approaches to debt management differ significantly. The Democratic approach under Harris would probably involve raising taxes as one mechanism for debt control.

While Trump’s Republicans traditionally advocate for debt reduction, his previous term saw significant debt expansion, mainly due to Covid-19 stimulus measures. The critical question for a second Trump term would be whether spending patterns would change significantly from his first administration.

A crucial factor in the long-term debt equation is the changing dynamics of international bond ownership. China, once the largest holder of US government debt, now owns 9.3% of the total and is increasingly focused on issuing its own debt. While the US is unlikely to face difficulties selling its bonds, reduced investor interest could lead to higher yields and increased financing costs.

Market implications

For investors, these scenarios are crucial to consider because they will affect investment portfolios differently depending on their time horizon:

• Short-term investors might find more immediate opportunities under a Trump administration.
• Medium-term investors could benefit from the stability offered by a Harris presidency.
• Long-term investors need to carefully monitor debt levels and international bond market dynamics under either administration.

While neither scenario predicts a market collapse due to debt levels, historical precedent suggests the importance of maintaining vigilance. Current stability doesn’t guarantee future market conditions, particularly regarding the sustainability of government debt levels. History has shown that everything is dandy until it is not. When things are good, it doesn’t mean they will stay that way forever, and thus we mustn’t ignore the potential risks arising from US government debt.

The most prudent approach for investors in preparing for either election outcome would be to focus on fundamental economic indicators rather than political preferences. Understanding these potential scenarios allows for better-informed investment decisions while acknowledging that economic realities often transcend political ideologies.

• Kadikoy is managing partner at offshore investment firm Levantine & Co.