Outcome of US election remains uncertain

The US presidential election is almost upon us. The situation is tight: it’s a neck-and-neck race with the final result set to be close. From an economic perspective, it’s difficult to say with any certainty what the election outcome will mean for the United States. Its impact on the financial markets is equally uncertain.

The financial markets are still largely ignoring the elections. As things stand, it’s not clear at all which candidate would be better for the USA economically.

In just a few days’ time, Americans will elect their head of state. For the country’s foreign policy – so for us too – this is an important choice. The Democratic candidate, Kamala Harris, favours sticking with America’s commitment to NATO and the UN, and, in turn, for continuity and reliability in foreign policy. Under Donald Trump, by contrast, there would be no guarantee of a predictable foreign policy coordinated with allies.

Domestically, the Democrat seems to be similar to her predecessor, while Trump has returned to his previous policy stance: Harris stands for a big, strong government, rising taxes for corporations and the rich, and a higher minimum wage. Trump on the other hand wants to cut taxes for corporations again and would like to limit the state to the greatest extent possible. The irony here is that, if allowed by congress, both will produce huge deficits in the national budget, which means that the US debt ratio threatens to rise unchecked whoever becomes president.

The results achieved by Democratic and Republican administrations are actually very similar in relation to the economy. If we look at the data since the Second World War, we can see that Republican presidents have been moderately more successful at fighting inflation. On average, inflation has fallen under their administrations. Meanwhile, Democratic presidents have had a slight edge in terms of growth.

What’s interesting to note is that these slight differences can actually be explained economically. Looking more closely, we can see that Republicans have usually suffered a recession in their second year in office, while Democrats have seen really good growth figures. If we make the clichéd assumption that Republicans have tried to fight inflation and that Democrats tend to go for more redistribution, this is exactly the pattern we should expect.

What the two parties have in common is that just four years after elections, both have generated high levels of growth and employment at an acceptable level of inflation. This in turn is due to the fact that voters give credit to the administration – of whichever party – for a good economic situation. However, it remains to be seen whether, if victorious, Donald Trump will be able to actively combat inflation, or whether Kamala Harris will manage to float major redistribution measures in the face of a Republican majority in congress. So we cannot predict with any certainty which of the two would be better for the US economy.

The same goes for the financial markets – neither side clearly has the upper hand. Particularly because neither Harris’s proposed higher capital gains taxes nor Trump’s announced restrictions on the US Federal Reserve’s independence would be welcomed by the stock markets.  

About Philipp Merkt

Philipp Merkt has worked at PostFinance since 2015  and is currently Chief Investment Officer and Head of Asset Management Solutions. Born in Solothurn, he studied IT and economics at the University of Fribourg and completed an MBA specializing in finance at the University of Bern and the Simon Business School at the University of Rochester in New York.

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