Macro Pulse for July 28: Trump vs. Harris – Does anything change?

Trump vs. Biden Harris

A change in the Democratic ticket for president makes the election more dynamic, but it doesn’t change much in real policy terms. In the policy areas with biggest stakes for investors– tax, immigration, trade and industrial policy – the Democrats’ approach will be the same. Our strongest conviction is that markets are driven by real policy change – not politics. That means any re-pricing in financial markets associated with Kamala Harris entering the race will be about the shifting likelihood of a Republican or Democratic win – not about the differences between Harris and Biden.
 

What matters to investors in this election
 

Tax policy: The expiration of the Trump tax cuts at the end of next year means new tax legislation is expected. Trump wants to extend the tax cuts while Biden’s plan included raising the top tax rate and imposing new taxes.

• What matters: The potential impact on the deficit. Trump’s proposed tax plan doubles the current deficit through 2034 according to the Congressional Budget Office. The Biden/Harris tax is part of a larger fiscal policy that seeks to increase both government revenues and spending. Whether this agenda expands the budget deficit depends on the success of tax policies which would likely require a Democratic majority in the House and Senate. Altogether: though the nature of the deficit would differ between candidates, both candidates are likely to lead more deficit spending. This expectation has shaped our view that inflation is unlikely to sink to pre-pandemic levels, and that yield levels on the long end of the curve are likely to remain volatile.
   

Immigration policy: Immigration was a major force in the economic recovery, according to the Congressional Budget Office and Fed, but the surge at the southern border has put immigration front and center. The large increase in immigration in the last couple of years has become very visible to voters, and so both candidates are likely to try and reduce immigration in total. Their approach is different: Trump wants to close the border and deport undocumented immigrants; Harris would likely attempt passing legislation through Congress.

• What matters: The truth is, the U.S. economy is not built for a sustained version of the immigration surge it just saw, but it’s also not built for no immigration at all. Closing the border could have big impacts on industries that rely on southern immigrant labor, such as agriculture, hospitality, and construction. In a tight labor market, like the one we’ve had for the last couple of years, lower skilled and unskilled labor would have resulted in higher inflation and potentially higher rates.
  If the border remains closed it could contribute to wage pressures which have been a big driver of inflation this cycle.
   

Given the extreme rhetoric around this issue, policy stagnation is also a risk. In his first term, Trump caused a government shutdown over the construction of a border wall.

Trade policy: Gone are the free-trade policies of the past – both Trump and Biden demonstrated a shift in U.S. trade policy. Still, the approaches to de-globalization are different, and this is one of the policy areas we see having the most impact on markets because some measures (tariffs) can be carried out without Congress.

As far as approach: Trump wants to reduce trade deficits; Biden sought to protect key U.S. industries. It should be said that although Trump and Biden/Harris hold different views on trade, the end result – “tough on China”, less free trade – is similar.  That is because both Democrats and Republicans view China as a strategic adversary and favor tariffs (on imports from China) to protect U.S. industry.

• What matters: Trump’s proposed tariff plan (10% flat tariff, 60% on imports from China) could be one of the most impactful policies proposed this cycle. These tariffs would raise prices for both businesses and consumers dampening investment and spending. As we noted last week, the president has significant discretion around levying tariffs.
   

Industrial policy: Trump is for deregulation while Democrats support regulation and spending to strengthen key U.S. supply chains. Both can be effective at supporting the economy and markets, and investors should be aware of what could change.

• What matters: The Inflation Reduction Act (IRA) was a cornerstone of Biden’s industrial policy, securing funding for clean energy projects. Harris would likely expand the IRA, but should Trump return to office, clean energy investors may need to be tactical. Tax credits for clean electricity and renewable power production are likely to remain, benefiting companies in these sectors. However, subsidies for wind projects and electric vehicles face greater risk.
  It’s also worth including that much of the investment from the IRA is directed towards Republican-held districts.
  
  

Putting it all together

For investors concerned about the election, we believe it’s important they keep in mind 1) the policy areas that could most impact the economy and markets and 2) how far apart the candidates stand in each of those areas. Below we visualize the distance of the candidates’ positions. Note that in the four policy areas, we see no difference between Biden and Harris, but meaningful distance between Trump and Harris. Immigration is where the candidates are furthest apart and their parties with them. As mentioned above, we expect this could create issues for the next Congress, especially if there is only a slim majority.

It’s also important to remember that what we’ve outlined here are the candidates’ proposals. In most cases, the makeup of Congress in addition to many other factors determine which policies are actually enacted. The differences between Trump and Harris below assume his/her party has a majority in both houses of Congress. However, a split Congress would result in a less extreme distance between the two as some compromise may be necessary to pass legislation.