It is a year of many elections worldwide, and frustratingly, we’ll have to wait right to the end for the most consequential and possibly closest run of the lot. Six months from now, the US will go to the polls to choose its president, congressional representatives, and state and local officials.
As things stand, it looks like the presidential election will be a rerun of the 2020 contest between Joe Biden (81) and Donald Trump (77), except that this time Trump is the challenger and Biden the incumbent. Biden, the presumptive Democratic candidate, is a lifelong politician.
Trump, the likely Republican candidate, is a disruptor in politics, having built his career in real estate and entertainment.
People either love him or hate him.
Biden is already the oldest US president ever. If Trump wins, he will narrowly be the second oldest, behind Biden. The median age in the US is 38, while life expectancy at birth for men is only 76.
Divided States of America
There are deep divisions in the US on key socio-cultural issues around race, gender, reproductive rights, immigration, gun rights and more. As the election nears, the noise around these ‘‘culture wars’’ will only increase. For investors, however, economic policy matters the most.
Closer to the time, we will revisit the state of the US economy and what that means for the election prospects of the incumbent and the challenger.
Notably, consumer confidence is remarkably low, given how strong the US economy is, especially compared to other developed countries.
For this note, however, the focus is on what each candidate means for global markets. There is some overlap between the economic policies of Trump and Biden. Both are wary of China, and both want to re-energise American manufacturing.
Biden, for instance, kept most of the import tariffs Trump imposed on China in 2018.
Under the CHIPS (‘Creating Helpful Incentives to Produce Semiconductors’) Act and the Inflation Reduction Act, the Biden administration has pumped billions into supporting US manufacturing of high-tech semiconductors, batteries and other green technologies. This has resulted in an almost three-fold increase in spending on the construction of manufacturing facilities.
But there are also major differences. If Biden wins, we should expect broad policy continuity with his first term, including further investment in domestic manufacturing and infrastructure and an emphasis on green energy. He will respect the independence of key US domestic institutions, notably the Federal Reserve.
In the foreign policy terrain, he will continue to be engaged with Nato and back Ukraine’s fight against Russia. Though supportive of Israel’s war on Hamas, he has increasingly voiced his frustration at how it is conducted, and his ongoing backing cannot be taken for granted.
In a nutshell, a Biden win would probably not have many new investment implications. The same cannot be said for a second Trump presidency.
Before discussing this, an important caveat: It matters greatly who controls the two houses of Congress. Currently, the Democrats control the Senate, thanks only to the vice president’s ability to cast tie-breaking votes. The Republicans have a majority in the House of Representatives.
Major domestic policy changes, particularly regarding spending and taxation decisions, need congressional approval.
In other words, if there is split control between the White House and the two chambers of Congress, the president cannot do much.
If the same party sweeps the presidency and Congress, as Trump did in 2016 and Biden in 2020, there is room for action. In foreign policy, however, the president has more leeway to act unilaterally.
Fiscal fears
Irrespective of who wins, the US has a long-term fiscal problem. Its debt-to-GDP ratio of around 100 percent (depending on what is included) seemed sustainable when interest rates were at rock bottom before Covid.
But at current levels, the US federal government will be spending around 4 percent of GDP on interest payments in the years ahead, according to the nonpartisan Congressional Budget Office’s predictions (this is close to the share of GDP South Africa currently spends).
Despite the solid economy, the US runs a 6 percent GDP deficit, usually associated with recessions (when tax revenues collapse and emergency spending rises). Worryingly, there is no sign that borrowing will be scaled back anytime soon.
Neither candidate has shown any interest in addressing the seemingly inexorable rise in public debt.
Indeed, Trump will likely extend the 2017 tax cuts that favoured companies and wealthy individuals, which are set to expire at the end of 2025.
If they are not extended, the tax burden on Americans will rise somewhat, which would be an economic headwind but reduce longer-term debt anxiety.
As noted, the future of fiscal policy depends greatly on which party controls Congress. Split White House-Congressional control also implies a recurrence of the debt ceiling stand-offs, government shutdowns and fiscal cliff scenarios that have dented trust in America’s fiscal policy process.
The country really needs a sober and objective look at the mix of government debt, spending and taxation, but there is no indication of this happening.
Geopolitics
One of Trump’s first actions upon taking office was to pull out of the Paris Agreement on Climate Change. Biden rejoined in 2021, but Trump will likely withdraw the US from its global climate change commitments again. This would be disastrous since it is the world’s second-biggest carbon emitter behind China.
Also worrying, from the point of view of America’s allies, would be a scaling back on its outsized Nato commitments.
Trump has criticised — probably correctly — large European countries like Germany, Italy and Spain for spending less than the targeted 2 percent of GDP on defence (annual US defence spending is around US$850 billion, or 3,5 percent of GDP).
He is very likely to halt US support for Ukraine, leaving it up to Europe to fund the fight against Russian aggression. And while Trump is a China hawk when it comes to trade, he is probably less interested in going to war to defend Taiwan. In other words, from a geostrategic point of view, a Trump presidency will lead to a more divided West and an emboldened Russia and China.
You’re fired!
Trump appointed current Federal Reserve Chair Jerome Powell in 2018 but almost immediately had buyer’s regret.
Powell raised interest rates, while Trump wanted lower rates to goose the stock market and support his political prospects. He made his feelings known on the matter, often venting on social media that the Fed had to cut rates.
Not since Lyndon Johnson attacked William McChesney Martin at his Texas ranch in 1965 did a Fed chair face such direct and sustained pressure from a president.
More recently, Trump also attacked Powell for cutting rates ahead of this year’s election, which might help Biden a bit. Of course, the Fed has not done anything yet and, if anything, expectations for rate cuts have faded.
Izak Odendaal is an investment strategist at Old Mutual Wealth.
