Harris vs Trump: Implications for investors and Australia

The resilient economy and shares favour Harris

The US economy remains strong, avoiding so far the much-feared recession. Even if one arrives this quarter (which looks unlikely) it will arguably be too late to impact the election in a month.

The so-called Misery Index (unemployment + inflation) has been falling and is down on a year ago, which historically points to a victory for the incumbent party (Democrats). According to research house Strategas, it has correctly predicted 15 of the past 16 election results since 1980.

US shares are strong – if they are up over the 3 months before the election the incumbent party tends to win & vice versa. This has been 83% accurate since 1928. Right now, it’s up 10.9% since 5th August.

But polling is very close

Key Trump policy differences versus Harris

Trade: Harris would basically continue current policies which have kept Trump’s first-term tariffs, added some and focussed on subsidies for green manufacturing in America. Trump is threatening a much bigger ramp-up in protectionism though with a 10-20% tariff on all imports and a 50-60% tariff on imports from China. This would take the average US tariff rate from around 2.5% to around 17%, a level last seen in the 1930s. In practice, Trump is likely to target countries with a trade surplus with the US (notably China, Europe and Japan), the tariffs may not get as high and it may be part of a “maximum pressure” campaign to bring production, including by Chinese manufacturers, back to the US (as occurred with Japan in the 1980s). The latter may be the case, but we could go through a lot of disruption as Trump initially ramps up the pressure resulting in a much bigger impact on share markets than seen in 2018 (where Trump’s trade wars contributed to an almost 20% fall in shares). This will likely be made worse as impacted countries respond with tariffs on US imports in retaliation. The impact will be an acceleration in the process of de-globalisation. Trump’s inability to have a third term may see him act earlier on trade and more aggressively than was the case in his first term as he will be less constrained by political considerations.

Cost of living: Harris is proposing a ban on grocery price gouging, support for home buyers and drug price caps

Climate policy: Trump will likely reverse the US’ net zero commitments and the policies Biden introduced to support it and support fossil fuels (“drill baby drill”). Subsidies for green manufacturing are likely to be replaced with wider support for domestic manufacturing (eg, a 15% corp tax rate).

Budget deficit: The deficit – already huge at 6% of GDP would likely get bigger under Trump (+2-3% of GDP) than under Harris (+1-2% of GDP).

The economic impact of a Trump victory

His policies in support of tax cuts and deregulation could help boost the supply side of the US economy via a boost to productivity (which is already good). However, on balance Trump’s policies – with higher tariffs resulting in higher import prices, lower labour force growth and potential moves to weaken the Fed’s credibility – risk adding to inflation.

Furthermore, his brinkmanship and erratic policy-making style are likely to add to policy uncertainty which could hamper business investment.

Much will depend on sequencing. If he runs with tax cuts and deregulation first (as in 2017) it could boost shares and the economy in say 2025, but if he runs first with sharp tariff hikes and immigration cuts it could be taken more negatively early on. In 2017 he ran with the positives first to help boost the economy, but this time around he may run with negatives first as there will be no constraint from the desire to win another election.

Finally, a Trump victory could add to geopolitical uncertainty by weakening US institutions and democracy and weakening US alliances. It could also lead to a quicker end to the Ukraine war but with loss of territory.

Likely investment market implications

Second, the next few weeks could see increased volatility if investors start to focus on the risks of a new trade war, a hit to the US labour force and increased uncertainty under Trump. After Trump’s victory in 2016 shares soared 38% to January 2018 as the focus in his first year was on business-friendly tax cuts and deregulation but they fell in 2018 as the focus shifted to trade wars. 

So, if Trump wins, the market reaction in the first 6-12 months will be heavily influenced by the sequencing of tariff hikes versus tax cuts.

Finally, a narrow Trump loss would likely see him challenge the result which could lead to political uncertainty adding to market volatility. Although US democratic institutions should hold as they did back in 2020.

Australia is vulnerable to a new Trump trade war

An OECD study showed that Australia could suffer a 1.2% reduction in GDP as a result of a 10% reduction in global trade between major countries. Resources shares would be most at risk and the $A would likely fall. 

Of course, similar fears existed during the last Trump trade war, and it didn’t turn out so bad. And there would still be demand for iron ore somewhere – it just may switch from China to the US and elsewhere. Much would depend on how other countries respond and how hard Trump goes. Of course, he may not win!