The political landscape leading up to the 2024 election is unlike any we've seen before. With fiercely contested races for the presidency, House, and Senate, both voters and investors are feeling the tension.
In this Q&A, Chief Investment Officer and Portfolio Manager Joseph Veranth, CFA, touches on some of the critical factors at play this election and emphasizes the importance of prioritizing economic fundamentals over political outcomes in investment decision-making.
Q. This election has introduced several unprecedented elements, from the Democratic ticket change to new voting policies. How have these shaped the overall political and market landscape?
Joseph Veranth: Every presidential election feels like the most polarized and the most important, but there’s a lot that's interesting and unprecedented about this one. Not the least of which is Vice President Harris replacing President Biden as the Democratic candidate less than four months before election day. At this point, the election feels un-callable, but recent polls suggest a slight shift toward Trump. We don’t read too much into that, though, because it’s shaping up to be a close race. Plus, the recent changes in election policies and procedures, such as expanded mail-in voting, extended deadlines for mail-in ballots, and, in many places, early in-person voting, add more complexity. Since we’ve only had one experience with these policies—in 2020, during COVID—it’s hard to draw meaningful comparisons. The Senate and House races are also very tight. For markets, the key factor is whether one party will control the presidency and both houses of Congress, as significant legislation usually requires that level of control. Republicans have a shot at flipping the Senate by winning seats in West Virginia and Montana, and if Trump wins, he might have coattails in down-ballot races, especially for the House. Whichever party succeeds in turning out the vote could see additional benefits further down the ballot.
The market has historically been positive under all six government compositions.
Source for above chart: https://go.ycharts.com/hubfs/How_Do_Presidential_Elections_Impact_the_Market/Election_Guide.pdf
Q. With tax policies under scrutiny, what are the key scenarios voters should consider?
Joseph Veranth: Many of the tax pieces of Trump's Tax Cut and Jobs Act (TCJA) are expiring in 2025. If Trump wins, most of those will likely stay in place. That said, 2026 is an election year for every single House Representative, so even if the House is close, it's difficult to see extremely unfavorable policies coming through on the tax side. Politicians love to give things away now and say they'll pay for them later.
The other thing I'm not sure many people are aware of is that the corporate tax cut was not a provision of the TCJA. So it does not sunset in 2025. I think most people consider that good for business.
Q. How are corporate executives reacting to the political landscape ahead of the election?
Joseph Veranth: If anyone likes to stay out of the political limelight it's corporate executives. Some tough lessons were learned by executives on both sides of the ESG issue these past few years. Regardless of which side they were on, they found they were on the wrong side of a portion of their customers and clients, so I think they try and stay out of it.
Q. Are election-related concerns causing investors to adjust their portfolios?
Joseph Veranth: In the past, we’ve dealt with individual investors who want to go to cash because they fear a Democratic win and others who want to go to cash because they fear a Republican win. Neither are logical moves. Presidential elections, historically, have had little impact on the market. Economic health is what affects the markets.
Q. What’s your assessment of the economy in these final weeks leading up to the election?
Joseph Veranth: The economy is in great shape. We’re still in an economic expansion and corporate profits are growing without driving higher inflation. We’re also encouraged by a trend we’ve seen over the past seven or eight quarters where companies are beating sales projections by less than expected but continuing to exceed earnings estimates. That tells us, even if sales aren't as good as executives expect, through proper execution, they've been able to drive and maintain margins and high profit growth. I think the pandemic and supply chain disruptions of the past few years have forced companies to learn how to rein in costs. Now that we're coming out of an inflationary period, some companies have been able to raise prices, which should continue to be good news for their profits and margins.
Q. Are there industries that will be significantly impacted by the outcome of the election?
Joseph Veranth: Election results typically have only minimal effects on industries and companies. And while it’s often assumed that, with a Republican administration, some industries may see less onerous regulation, less FTC litigation, and less Justice Department litigation, resulting in potential tailwinds, that may or may not be true.
History has shown, no matter how the political landscape changes, companies usually find a way to adapt. For example, in 2017 and 2018, when tariffs were placed on China at the beginning of the Trump administration, companies were very adept at finding and developing alternative supply chains through Mexico, Vietnam, and other countries. So the idea that any political change is going to be detrimental to a company doesn’t work within a static framework. Companies will do what they can to alleviate any perceived damage from policies, and they often start to adapt even before these policies are implemented.
Again, election outcomes don’t have a large influence on markets. We encourage clients to stay invested within their risk tolerances. That’s the key message we want to convey to investors.