What the election might mean for your portfolio

Summary

• Initially, markets anticipated a Republican win, boosting interest in assets like oil and crypto, but this “Trump trade” shifted with Harris’s entry into the race.
• TIAA Wealth Management Chief Investment Officer Niladri “Neel” Mukherjee advises caution—don't overreact to short-term political changes as it can lead to disappointing investment outcomes.
• Both parties’ focus on tax cuts and public spending means the likeliest election impact on financial markets will be a higher federal budget deficit, which would put upward pressure on interest rates and inflation.

Four months ago, investors were betting big on a Republican win on Election Day. Polls in July showed President Joe Biden’s poor performance in the first presidential debate boosted not only the odds of former President Donald Trump reclaiming the White House but of Republicans winning the House and Senate too. Consequently, those investments perceived as favorably exposed to a Republican victory—oil, crypto, etc.—were all flying high. Pundits started calling it “the Trump trade.”¹

Yet an election outcome that seemed clear in early summer now appears anything but. Biden’s withdrawal on July 21—paired with subsequent enthusiasm about Vice President Kamala Harris replacing him at the top of the Democratic ticket—has transformed the race into a barn burner.

In October’s issue of the CIO Perspectives newsletterOpens pdf, TIAA Wealth Management’s chief investment officer, Niladri “Neel” Mukherjee, explores what different election outcomes could mean for your investments. But his analysis comes with a caveat: Political prognostication is tricky, and picking stocks and bonds based on these prognostications is even trickier—as the demise of the Trump trade shows. Not only do political fortunes sometimes rise or fall with a single debate, but there’s no guarantee positions taken before Election Day will have any bearing on legislation passed or policies pursued after Inauguration Day. For these reasons, Mukherjee cautions that “overreacting to short-term, election-related noise often produces disappointing absolute and relative investment returns.”

For a complete rundown on what victory by either party could mean for the economy and the markets, read the full “Electionomics” edition of CIO Perspectives hereOpens pdf. Below are highlights:

Economic priorities

Harris’s economic agenda would focus on four key areas:

• Implementing child tax credits of up to $6,000 for newborns and $3,600 for older children
• Supporting the housing market with $25,000 in downpayment aid for first-time homebuyers and with tax credits for real estate developers
• Extending the Tax Cuts and Jobs Act (TCJA)² tax cuts set to expire at the end of 2025 for all individuals earning less than $400,000
• Cutting prescription drug costs, capping out-of-pocket medical expenses, and eliminating medical debt

Trump’s economic agenda would focus on three key issues:

• Extending all expiring provisions of the TCJA
• Repealing the tax on Social Security benefits
• Cutting the corporate tax rate from 21% to 15% for companies that make products in America

To pay for her proposals, Harris envisions higher corporate tax rates, higher taxes on capital gains and a restoration of the top individual tax rate of 39.6% for those earning more than $400,000 (or $450,000 if filing jointly). To pay for his, Trump has teased a 60% tariff on all Chinese goods and a broad 10% tariff on all goods imported into the U.S. 

According to Mukherjee, both parties’ focus on tax cuts and public spending means the likeliest election impact on financial markets will be a swelling of the federal budget deficitOpens pdf. This would put upward pressure on interest rates and inflation, making Treasury Inflation-Protected Securities (TIPS) increasingly attractive relative to traditional Treasury bonds.

The Harris trade vs. the Trump trade

Mukherjee believes the corporate tax increase proposed by the Harris campaign would weigh on U.S. stocks by reducing earnings growth and absorbing cash that could otherwise be reinvested or distributed to shareholders. This would favor defensive stocks—such as utilities—given their ability to pass cost increases onto customers. Real estate investment trusts (REITs) might also gain favor since they are not subject to corporate tax (so long as they distribute at least 90% of their earnings to shareholders). Harris’s proposal to hike personal income taxes on the wealthy should be good for municipal bonds, since their tax exemption would become more valuable. Finally, the VP’s plan to invest in housing could boost homebuilder and industrial stocks.

If Trump wins, Mukherjee expects a ramp-up in trade tensions. This “could induce volatility in equity markets, where large-cap companies have global footprints and where higher import prices could weigh on consumption,” he writes. In such a scenario, small cap stocks might outperform large caps, since the former generate most of their revenues domestically. It might also favor U.S. stocks relative to non-U.S.

A Trump win could also impact the energy and banking sectors. A Trump administration would likely make more land available for domestic oil-and-gas exploration. It would also loosen capital rules for banks, especially small and regional ones. “Financial stocks,” Mukherjee writes, “would stand to benefit through lower compliance and regulatory costs, more capital available to distribute to shareholders, and fewer balance sheet constraints.” A potential downside is that looser regulation would make it easier for banks to take bad or excessive risks. 

Election uncertainty and the importance of staying disciplined
Elections, of course, are not the only factor likely to impact markets in 2025. Uncertainty about the economy, questions about whether the Federal Reserve will continue cutting rates and disappointing economic data coming out of China could impact portfolios just as much as what happens on Election Day. “The significant uncertainty surrounding the election and each party’s economic agenda reinforces the importance of a disciplined and diversified asset allocation,” Mukherjee writes. “Therefore, we recommend clients stay the course and remain anchored in their long-term investment strategies.”

Click hereOpens pdf to read the full version of October’s CIO Perspectives. For more insights on how the 2024 U.S. presidential election might impact the markets and the economy—and to discuss the implications for your investment portfolio and financial plan—please schedule a meetingOpens in a new window with a TIAA advisor.