Hail to the Chief

• Trump versus Harris
• Potential implications for Canada
• What about the markets?

We’re now less than two months out to the U.S. elections on November 5, 2024 and it’s already been a race for the ages. Democrat Joe Biden pulled out at virtually the last minute. It’s only the seventh time a sitting president decided not to run for a second term and the first time since Lyndon Johnson in 1968. Biden’s successor, Kamala Harris, is only the second woman to run for president for a major party in the U.S. and the first woman of colour. On the Republican side, Donald Trump – who was shot in early July in an attempted assassination – is trying to become only the second former president to win re-election in a non-consecutive term.

With the candidates finally set and the conventions over, it’s time to take a deeper dive into the implications of a Republican or Democrat victory from an economic standpoint.

Trump versus Harris

First, let’s look at what Republicans are offering. Trump’s policies can be characterized as a bigger and bolder return to his greatest hits. Some of the key planks include:

• Tax cuts. In his first term, Trump enacted a massive tax cut which permanently lowered corporate taxes to 21% from 35% and temporarily lowered personal rates (expiring at the end of 2025). This time around Trump wants to make the personal tax cuts permanent while also lowering them and corporate taxes further. He also wants to stop taxing Social Security benefits.
• Higher tariffs. Trump is looking for a 10% across-the-board tariff on imported goods, with potentially 60% tariffs on China.
• Fewer immigrants. Trump would launch a significant deportation effort on illegal immigrants, as well as limit the number of legal immigrants coming into the country.

Harris’s proposals are much more nuanced. The Democrats are running on a platform very similar to the one they ran on in 2020, with few changes to how they’ve been governing. Much of the emphasis in 2024 is on non-economic issues like abortion and education. Economic proposals include improved child tax credits, lower drug costs and some first-time home buyer incentives. The most impactful economic proposal, in our view, revolves around raising corporate tax rates (to 28%) and personal tax rates on individuals earning more than $400K, while keeping the Trump tax cuts for those making less than $400K.

We don’t get a vote in the U.S. election. If we did, it would be hard to pick between the candidates on purely economic policies. One wants to tax and spend while the other wants to not tax and spend. Economists tend to agree that the Republican platform would be better for growth and worse for deficits (to be fair, neither party seems to care about balancing the budget). A further negative for the Trump platform is that it could also prove inflationary, with tariffs driving up prices and fewer immigrants driving up labour costs or causing shortages.

Potential implications for Canada

Which candidate would be better for Canada? From an economic standpoint, Harris does seem better. Not for what she would do for Canada, but more because her victory would represent the status quo.

If he won, Trump’s 10% tariffs across the board could be very negative for Canada. In 2023, over 75% of our exports went to the U.S., with the total dollar amount representing 20% of our GDP. Importers pay tariffs to their home government. The proposed tariff increase would amount to a 10% increase in the effective cost of our goods to American companies. Such a rise would certainly have some customers looking to negotiate a better price with a non-Canadian vendor, or perhaps the importer would demand price concessions. Our best outcome would be that Canada would be exempted from much of the tariffs due to the the US-Mexico-Canada Free Trade Agreement.

A second negative for Canada under Trump would be a further widening of our tax codes. Another U.S. tax cut would increase the divide between our two countries and continue to make Canada a less desirable place to live and operate a business relative to the U.S. from an economic standpoint.

What about the markets?

What drives markets are corporate earnings and what drives corporate earnings are a vibrant growing economy. On this front, Trump seems to have the advantage. A Harris government that raises corporate taxes would see corporations posting lower earnings, which would be negative for the U.S. market.

Investors tend to spend a lot of time discussing an election’s potential outcome, and strategists publish countless notes on what sectors to own and how to position portfolios based on who may win. Volatility picks up leading into the election, and sometimes after.

Although we also analyze potential outcomes, we find the analysis of little practical use in making investment decisions. After all, politicians are notorious for saying one thing in a campaign and doing another while governing. Also, in the U.S. it’s difficult to fully enact your policies unless you run the electoral table (i.e., presidency, Senate and House). Of course, the unforeseen also has a way of disrupting the best laid plans.

Going back to the Presidency of Kennedy, we can see that only two presidents over the last sixty plus years have seen a negative annualized return during their tenure. Over this time period we’ve seen tax cuts and hikes, tariffs added and removed, high and low interest rates, benign and run away inflation and countless campaign promises kept and broken. Every election causes concerns and angst depending on our political leanings and who wins. History has shown us that much of this angst, at least when it comes to markets, is misplaced (see figure 1).

Figure 1: Annualized returns for respective presidencies from 1961 - 2024

While the upcoming U.S. election presents significant uncertainties which may have varying implications for growth, inflation and trade in the U.S. and beyond, history reminds us that markets tend to weather political shifts more resiliently than anticipated. As investors, it’s crucial to maintain a long-term perspective, focusing on diversified portfolios that can endure short-term volatility. Our investment strategy continues to prioritize the fundamental principles of risk management and capital preservation, ensuring that our clients’ portfolios are well positioned regardless of the election outcome. 

Source: FactSet