Investors would do well to maintain a disciplined approach to investing, avoiding the pitfalls that could potentially derail portfolios from their long-term goals.
After a stretch of strong investment returns, the 2024 presidential election adds an extra element of uncertainty for investors. The contest marks the first presidential rematch since 1956 and will come into greater focus this summer as campaigning heats up. However, while elections can garner a significant amount of attention in American life, their impact on investment outcomes is often much more muted. This is because it is policy, not politics, that matter for investment outcomes.
As such, which policy issues should investors be mindful of? First, taking center stage of the fiscal debate will be the decision of whether to extend tax cuts from the 2017 Tax Cuts and Jobs Act (TCJA). The challenge here is two-sided for both candidates: either extend the tax cuts and increase the debt or allow the tax cuts to expire and hurt growth. So far, Biden has proposed a partial extension of the tax cuts and expanded tax credits with potentially higher taxes on wealthy households and corporations. Whereas Trump has pledged to make the individual and estate tax cuts of the TCJA permanent, partially offset with spending cuts. Under either candidate, deficits are likely to widen (primarily due to rising interest costs) and discretionary spending is likely to be cut, creating a modest headwind for growth and some upside risk for yields.
Outside of taxes, immigration and U.S./China trade policy will also be key issues. In either outcome, immigration is set to slow after a period of significant border crossings boosted net immigration to an estimated 3.3 million in 2023.1 Many economists believe this boost in labor supply has enabled the goldilocks combination of strong growth and declining wage inflation, with continued improvements expected as migrants are integrated into the workforce. New restrictive measures could limit this effect. On trade, both candidates have reflected a “tough on China” stance with renewed attention placed on tariffs. However, the secular trend of friend-shoring and diversification from China will likely continue and the effect of tariffs and supply chain realignment on inflation and U.S. profit margins has so far been muted.
The campaign season will surely see many bold promises to implement major change, but their translation to real policy change is hardly straightforward, and even less so to investment outcomes. Instead, economic context is the more powerful driver of market performance. As such, investors would do well to maintain a disciplined approach to investing, avoiding the pitfalls that could potentially derail portfolios from their long-term goals.