Sleeping with an Elephant

Before we dig into the potential investment implications of the election, it's important to note that, historically, markets have largely been unaffected by U.S. Presidential election outcomes over the long-term. The direction of the market, no matter the outcome, is more likely to be driven by fundamental factors like interest rates and corporate earnings. Sure, the possibility for short term market gyrations based on headlines and political rhetoric can be expected, but longer term, asset values and returns are largely driven by fundamentals.

A Donald Trump victory for the Presidency may cause a knee jerk sell off of fixed income and a Trump sweep would mean that his 2017 tax cuts will be extended. On the flip side, he could also cut government spending or raise revenues through tariffs. All in all, it would likely be bad for fiscal sustainability. A victory for Joe Biden would not be much better for the fiscal picture. While he is unlikely to extend tax cuts for high income earners (and may increase corporate taxes) any savings are likely to be spent on policy priorities such as the child tax credit. In either case the U.S. is likely to continue to see higher than normal deficits.

Initially, a Trump sweep would likely lead to an equity market rally. Investors would be happy about the likelihood of an extension of the tax cuts that expire next year while possibly expecting even more tax cuts. Investors would also be looking for deregulation, especially in the Energy and Financial Services sectors. Over the course of the Presidency, this can moderate, particularly in the face of a trade war due to Trump's proposed tariffs. A Biden victory would likely see a continuation of his first term policy preferences, favouring green energy and onshoring, with a continued strict regulatory regime across a host of sectors. It's important to note that a policy preference for certain sectors doesn't necessarily mean outperformance over the course of a Presidency as many other factors will impact sector performance.

Alternative asset classes tend to be comprised of very long duration holdings and the transition green economy is unlikely to change under either candidate. However, Trump does not see Biden's green spending initiatives favourably, so with a Trump win we could expect some headlines around funding for electric vehicles and renewables. Regardless, these assets will likely continue to provide stability in portfolios and have an important place, whether it's Trump, Biden, a unified Congress or a divided Congress.

This isn’t the first big election, and it won't be the last and there are positives and negatives to any of the potential outcomes. But at the end of the day, policy is just one input to a much larger mosaic from an investment standpoint. There are a lot of other considerations that matter much more than policy, and whether it's a Democrat or Republican President, a majority or split Congress, or any other combination, there's not a massive difference in performance results over the long term.

Editor's Note: On July 21st President Biden announced that he will not seek re-election and endorsed Kamala Harris as the Democratic candidate for President. Kamala Harris’s candidacy was confirmed at the Democratic National Convention in August. Policy positions for Harris are likely to remain status quo and very similar to Biden’s.

The information contained herein has been provided by TD Asset Management Inc. and is for information purposes only. The information has been drawn from sources believed to be reliable. The information does not provide financial, legal, tax or investment advice. Particular investment, tax, or trading strategies should be evaluated relative to each individual’s objectives and risk tolerance.

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