Market Update 4th November 2024

Nothing is certain except for death and taxes

Financial markets are in the midst of a crucial two-week period. In the UK we had the eagerly anticipated budget from the new Labour government, whilst the US had one of the busiest weeks of the Q3 earnings season with 5 of the Magnificent 7 reporting. We also have US jobs data and a Fed meeting too. Here, however, we focus on the most anticipated event of the period – the US election.

Trump and Harris are two very different characters, who have different priorities. Naturally we have the usual Republican vs Democratic differences on many social issues such as gun control and immigration, however these aren’t what matters most to equity investors. Instead we need to focus on what policies have the most potential to impact markets and how the two candidates differ on these. This is most evident when it comes to import tariffs.

Donald Trump has been insisting he will adopt protectionist trade policies. This includes a potential universal tariff of 10% on all imports and a rate of 60% on imports from China. His reasoning is that this will incentivise companies to grow their US-based operations, in the process creating more jobs and generating revenue to fund other tax cuts. Whether this would have the desired effect is debatable, but that’s the logic.

Perhaps because of the polarised nature of US politics, it is logical to think Kamala Harris would have a radically different stance. While it is unlikely she would go anywhere near as far as Trump, the reality is she is not against tariffs, and neither are the Democrats. The Biden-Harris administration have kept many of the tariffs from Trump’s term in place and even increased some in certain areas – a Harris presidency certainly does not mean an end to this. We would therefore expect a continuation of many tariffs, such as the imposition of duties on EVs from China. However, what is not as clear is what new tariffs she could introduce.

The potential for increased barriers to trading, particularly those possible if Trump were to win, has naturally caused concern among investors. Most worrisome is the fact that Liz Truss’ mini-budget showed us what can happen in the bond market when investors suspect the sums don’t add up. A repeat in the US would be horrific. On a stock-specific level, basic economic principles tell us that any friction to free trade creates an opportunity cost. Tariffs typically result in increased costs for domestic consumers as importing companies usually end up passing on some or all of the costs. So all else being equal, it is fair to assume corporate earnings estimates would be revised down, at least in the short term.

But all else will not be equal. The effectiveness of tariffs and their impact on financial markets is influenced by many other factors. Currency, to name just one. We also shouldn’t assume that what a politician says and what they subsequently do actually correlate. Sure, Trump has form for protectionism – in his last term he introduced duties on around 14% or $380bn of the total $2.7tn imports – but he also has form for making headline-grabbing comments that never come to fruition – the Mexican border wall springs to mind.

Added to which, tariffs are obviously not the only policy of each candidate. If one viewed Trump’s tariffs as negative for the market, his stance on lowering corporation tax would be a positive, so impacts could be balanced out to some extent.

Nonetheless, dismissing the risk of a radical overhaul of US fiscal policy is dangerous. But to confidently join the dots between what a politician says before an election and subsequent movements in currency markets, interest rates, inflation, corporate earnings, consumer confidence and ultimately asset prices is equally hazardous. There are clearly a lot of moving parts to the equation.

We therefore need to be aware of the short-term risks, but not let these blind us to long-term opportunities. Regardless of whether the White House turns Red or stays Blue this week, America will remain home to some of the world’s best businesses. On a multi-year view, there are few markets that can compete with its track record of value creation.

Rowan Roff-Stanion – Junior Research Analyst

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