The market and economy amid election uncertainty

Election uncertainty may pose a near-term challenge for the markets. The mix of probable outcomes – both for the White House and control of Congress – do not, in our estimation, include policy outcomes that are strongly positive for the markets or the economy. Most election outcomes, particularly those with the highest probability, we believe will be taken as relatively neutral by the markets. Our discussion below of potential impacts of various election outcomes is solely from the perspective of economic and market considerations.

“Re-setting” election probabilities

Rather than parse through shifts in campaign momentum and “margins of error” for various swing state polls, it is reasonable for the time being to consider the election odds for former President Trump and Vice President Harris a toss-up. The most likely path for a Vice President Harris victory remains through the swing states of Pennsylvania, Wisconsin, and Michigan, which on the surface appears a narrow path but is one that also could have a high degree of correlated outcomes among those states. We see the market implications of a potential Vice President Harris victory as representing continuity and the status quo. Regulation, spending, and other priorities – as they affect financial markets – would likely remain similar to the current environment due to the low probability of Democrats retaining control of the Senate (see Senate math). Continuity and little change imply that big market shifts that would be a direct result of a Vice President Harris victory are unlikely.

Trump 2024 presidency may not be quite the same as Trump 2016 

While some areas of focus for former President Trump remain the same – e.g., deregulation and fossil fuel permitting – other seemingly overlapping policies are likely to play out differently than in 2016 should former President Trump win in 2024. First, tax cuts were a major focus post-election in 2016, but another round of tax cuts would only be a possibility in the case of a Republican sweep. Even then, we expect that subsequent corporate and personal tax cuts would be much more modest than those passed in 2017. There is now less fiscal room to maneuver as debt and deficit concerns have surged since that time – particularly in the aftermath of the COVID pandemic (Exhibit 1). Any policies that significantly worsen this already strained trajectory of debt and deficits could push up longer term interest rates, which, in turn, would create a headwind for the economy and markets if that occurred.

Exhibit 1: U.S. Federal Debt and Deficits

Source: Federal Reserve (2024), U.S. Department of Treasury (2024), Congressional Budget Office (2024),
BMO Wealth Management (2024); CBO projections as of June 2024; Debt/deficit data current through Q1 2024

While trade, tariffs, and China featured prominently in former President Trump’s prior time in office, those issues are likely to take even greater importance should he win in 2024. Punitive tariffs on Chinese imports (60% across the board has been discussed) could result in both a trade shock and a trade war. The prospect of 10% tariffs on the rest of the world, while perhaps used more as a negotiating tool than a blanket policy, would also be disruptive even if implemented partially. Countries that run large trade surpluses with the U.S. would likely be lined up for stick-stick-stick-and-carrot tariff and trade negotiations. The resulting economic shifts could harm or benefit different companies or industries in different ways, but the overall macroeconomic effect we believe would be modest. We could envision short-term negative market impacts, but we do not believe those impacts would remain over the medium-term or long-term. In particular, the modest inflation pressures resulting from higher tariffs would not be significant enough to alter the current course of moderating inflation readings overall.

The Big Picture

While politics and policy can be a significant force in the economy or markets, they are by no means the only ones in play. The forces underpinning the U.S. economy continue to defy skeptics – Q2 GDP growth was a healthy 2.8% and expected S&P 500 earnings growth for the quarter is nearly 10%. Inflation is clearly on a moderating path (Exhibit 2), and the Fed’s rate cutting campaign should begin in September and continue throughout 2025. Based on the degree to which inflation is moderating, Fed Chair Powell said in his 7/31 press conference, “There’s a lot of room to respond if we were to see [labor market] weakness.” The Fed is shifting from headwind to tailwind, and the soft-landing we’ve been discussing since December of 2022 is squarely upon us. 
 

Exhibit 2: U.S. Consumer Price Index (CPI), monthly %  
(3-month moving average)

Source: Bureau of Labor Statistics (2024), Bloomberg L.P. (2024)
BMO Wealth Management (2024); As of 06/30/2024

Election uncertainty is likely to be at a fever pitch come November. It is possible for that uncertainty to spill over temporarily into the economy and markets. A similar pattern held in both 2016 and 2020 as the stock market exhibited choppiness in September/October prior to elections. When this curtain of uncertainty lifts, however, the economic act that follows is not high-wire, edge of your seat, but rather likely to be steady, resilient, and having found its rhythm.