As both campaigns in the U.S. presidential election barrel toward Election Day on November 5, the Democratic and Republican parties have wrapped up their conventions, where candidates are formally nominated and the parties adopt their policy platforms. Investors may be wondering if the information coming out of the conferences could help them discern how either party’s victory could affect markets.
While the conventions may have helped voters decide whether to cast a ballot for Democratic Vice President Kamala Harris or Republican former president Donald Trump, we think investors planning portfolio moves ahead of the election have a lot less to go on. Here’s why:
1. Conventions rarely move the needle right away.
Modern conventions are highly scripted with few surprises, and by the time a party’s luminaries gather, its candidate and broad policy positions are largely known to voters. That means the conventions seldom tell us much in the near term about who’s going to win in November or how either party will fare in House and Senate elections. While a good convention can benefit the party’s candidate over the longer term by giving him or her momentum and imbuing supporters with a burst of enthusiasm, it will take several weeks of polling data for that to become clear.
2. New policy proposals may not pass Congress.
The conventions are aimed at winning over voters rather than introducing detailed policy proposals. Even when parties do unveil new policy ideas, there’s no guarantee they will ever become law and thereby have an impact on markets.
In the run-up to last week’s Democratic convention, for example, the Harris campaign proposed credits and subsidies for homebuyers and builders intended to make housing more affordable, as well as an expanded child tax credit. But it’s anyone’s guess as to whether those would ever be implemented, even if Harris wins and even if the Democrats hold the Senate and win control of the House. The policies would need to be passed into law by Congress, and elected Democrats have said little about whether they support these proposals. Investors may recall the widespread but ultimately erroneous assumption that Republicans would repeal the Affordable Care Act after sweeping the 2016 elections.
Where to Focus
What should investors consider as the campaigns head into the final sprint?
Before the vote, the business cycle will probably affect markets more than the ups and downs of the campaign. The Morgan Stanley Research cross-asset strategy team has found no clear pattern of market behavior in past election years, and polls and prediction markets show the race is very close. In sum, we don’t think investors’ near-term strategies will focus on the election.
Following the election, we expect the impact of the election in equity markets to be most pronounced in specific sectors. For example, in the event of a Democratic win, energy and telecom could be relatively worse off under the most politically viable version of the Democrats’ plan for extending tax breaks, but clean tech could do better as thanks to protection for clean energy appropriations under the Inflation Reduction Act (IRA).
The outcome of the election could affect the U.S. Treasury yield curve, which plots bond yields against maturity dates, as well as the U.S. dollar. Trump has said he plans to dramatically increase tariffs, which would weigh on economic growth and lead to a steeper yield curve—meaning the payout for longer-term bonds could rise at a faster rate than shorter-duration treasuries—on the increased risk of higher inflation.
Meanwhile, Morgan Stanley’s foreign exchange and economics teams think the dollar will rally if Trump wins, because he has vowed to raise tariffs and can do so unilaterally, without Congress’s approval. Tariffs are likely to weigh on growth in the U.S. and even more so abroad, which could drive foreign central banks to ease monetary policy, weakening their currencies relative to the dollar. By contrast, a Harris victory would likely act as a headwind to a strengthening dollar, because continuity on trade and tariff policy would lessen the flow of foreign capital into the safe-haven dollar.
What’s Next?
With just over two months to go until the election, many things can still happen. Morgan Stanley Research will be watching for either candidate to introduce new—and plausible—policy proposals with market implications.
For deeper insights and analysis, ask your Morgan Stanley Representative or Financial Advisor for the full report, “Party Conventional Wisdom,” (Aug. 25, 2024).
