The year 2024 is notable for the number of elections around the world. Around 4 billion people, almost half the world’s population will have gone to the polls once the year is out, including in eight of the ten most populous countries, Bangladesh, Brazil, India, Indonesia, Mexico, Pakistan, Russia and the United States. The US election is the most important for the global economy and the world’s financial markets.

We are less than two months away from the US presidential election. Traditionally financial markets start discounting the likely outcome and policy implications in September. This partly explains the increased level of volatility over the past couple of weeks. Yet, US equity markets have historically performed well during election years, regardless of the winning party or whether it’s a clean sweep across the White House and Congress. Between 1936 and 2020, the S&P 500 index has returned an average 8.2% during election years. Negative election years are rare and typically associated with other factors such as recessions, the world war in 1940, the Dot.Com bust in 2000 and the Global Financial Crisis in 2008. US stocks rise even in politically tumultuous election years, such as 1968 when Richard Nixon was elected. That year is remembered for the assassinations of Martin Luther King and Robert F. Kennedy and violent anti-Vietnam war protests at the Democratic National Convention.

Financial markets are guided first and foremost by the state of the economy and interest rates as opposed to presidential election policy pledges. This year, both candidates have voiced radical polices, which is concerning. Donald Trump, Tariff Man, has threatened 10-20% import tariffs across all countries, except China where he has threatened to impose 60% tariffs. He said: “We’re going to have 10 to 20% tariffs in foreign countries that have been ripping us for years.” His pledges have reached even more extreme levels, at one point threatening trading partners with a 100% tariff levy if they do not stick with the US dollar as their trading currency.

Kamala Harris wants to impose a federal ban on price-gouging at grocery stores: “It will be my day one priority to bring down prices: to take on the big corporations that engage in illegal price gouging.” The merest whiff of price caps has caused some panic amongst economists. Once the government starts to set prices, the price inevitably gets set below the marginal cost of production, supply dries up and in the long-run prices end up even higher than they would have been.

These radical policy pledges are highly inflationary, which means they are likely to be considerably watered down. Both Trump and Harris are keenly aware that inflation is one of the biggest concerns facing voters. Rather than implementing the worst-case tariff scenario Trump will likely use the threat to gain concessions from trading partners. Making deals is his preferred strategy. Harris will likely err on the side of caution, leaning towards increased competition as a means of lowering prices rather than setting price ceilings.

These are not the only economic policy pledges. Trump wants to cut the corporate tax rate while Harris wants to increase it with the extra revenue going towards childcare support and down-payments for first time home buyers. Both candidates will lift the budget deficit, Trump through tax cuts and Harris by spending more. However, fiscal policy changes are not straightforward. Both tax and expenditure require Congressional as well as White House support.

The presidential election outcome is difficult to call, complicated further by the electoral college system which favours Trump. Also critical is whether the Democrats or the Republicans win the Senate and House of Representatives, as Congressional support is required for Tax and Spending bills. The chance of a clean sweep for either party is low, although higher for the Republicans at around 20% than the Democrats at around 10%. The most likely outcome, with around 35% probability is a split Congress with either candidate in the White House.

In regulatory and trade policies, Congress is less of a counterbalance, with the White House having far greater influence through executive orders and personal selections to staff agencies. Here, Trump wants to deregulate. He has enlisted Elon Musk to pursue aggressive deregulation. He also wants to curb immigration and impose trade tariffs, which he will be able to do regardless of which party wins Congress. Harris will be able to crack down on price gouging without Congressional support.

In theory, either candidate will be able to implement their most radical policy pledges without the support of Congress, which is perhaps why financial markets are particularly concerned this time round. What do the experts say? Goldman Sachs economists say every percentage point increase in tariffs would push inflation up by 0.1%. The company forecasts Trump’s policies would slow economic growth in the second half of 2025 by up to 0.5%, while it says Harris’s plans would slightly boost GDP growth. Analysts at TD Securities estimate a 10% universal tariff levy would increase inflation by 0.6-0.9%. Combined with immigration restrictions, economic growth would reduce by 1-2%, potentially tipping the economy into recession. Harris’s plans have been quite vague so far, which is perhaps why she is being given the benefit of the doubt by economists. Her election is probably the lower risk outcome, entailing a continuation of the status quo.

Donald Trump will inevitably water down his radical policy pledges, besides making questionable economic sense they are also contradictory. On the one hand he is promoting a weaker dollar to make imports less competitive, but tariff levies would strengthen the dollar. Independent research firm Aline Macro says: “A second Trump presidency increases the likely permanence of a favourable corporate tax regime alongside low regulatory burden, in a boost to corporate profits, and net positive for equities…. Major risks include trade frictions and supply-side immigration shocks.” On his opponent, they say: “A Harris administration is a net-negative for equities given likelihood of higher taxes on corporations, wealthy individuals, and the treatment of certain investment transactions in addition to a greater regulatory burden… A tighter regulatory regime could weigh on Biopharma, Banks & Capital Markets, Legacy Energy, and Mega Tech.”

There is a considerable range in opinion among financial analysts on which presidential candidate would most benefit financial markets, but they are generally agreed on one thing: That earnings growth and the cost of capital (Federal Reserve policy) are of far greater consequence than the outcome of the November 5th election.