Election Uncertainty

Article

In light of recent tumultuous events, including the assassination attempt on former President Donald Trump and current President Joe Biden's exit from the U.S. presidential race, it's essential to be able to address the concerns your clients may have and help them navigate through the resulting uncertainty. Understanding the behavioral biases that may influence their decision-making can be particularly valuable during these times.

Presidential elections have real impacts on markets and investors, since presidents can influence economic policy, regulation, taxation, and other key government actions, yet most people overestimate both the magnitude of these effects and a president’s power to make changes. For example, the president has little power to influence interest rates in the short run, given the independence of the Federal Reserve. Similarly, while gasoline prices are common complaints about presidents, their ability to significantly change is not what people expect. Economic changes tend to happen slowly, and with long delays. In short, presidential elections are important for the long-term economic health of the United States, but in the absence of catastrophic errors, they are unlikely to cause immediate large changes. Even in an election where the underdog won, the outcome was not a huge surprise to markets, which had priced in a greater than 30% of President Trump winning. The U.S. system is designed to not dramatically shift with the election of one person.  There is no reason for the vast majority of investors to expect significant immediate changes.

What are truly threats to the economy, however, are the perception economic changes will be dramatic and any social and political unrest. The biggest threat to an investor is the fear that election outcomes require massive actions to investment strategies not justified by underlying economic factors. This is why they have and benefit from financial advisors who can help them reason through any potential changes and act (or not act) accordingly

So, What’s Going On?

  1. The assassination attempt on former President Donald Trump has added a layer of unpredictability to the political landscape by projecting and affecting market sentiment. It has raised concerns that surprise events might change expectations immediately and has raised the specter of social unrest in the wake of the election and disruptions to the smooth transitions of power.
  2. Until more firm economic policy proposals have been put forward by both sides of the presidential race, there is uncertainty in investors around the economic outlook, including fiscal stability, inflation, taxes and tariffs, etc. These are all likely to be influenced by the election, but their effects will be less immediate and drastic than investors expect. Fiscal stability is a significant concern for the long-term economic health of the United States. However, the 'fiscal cliff' remains a distant issue, and there has been limited discussion on addressing the deficit through increased revenue or reduced spending, particularly in areas such as Social Security or Medicare.
  3. Uncertainty on whether the Fed will lower interest rates, possibly even before election day, might impact the stock market and bond rates on a more short-term basis. The Fed’s reasoning on either outcome will likely inform market participants’ expectations about short-term inflation, unemployment, and GPD development. It’s important to note that the Federal Reserve under Jerome Powell has moved cautiously in lowering interest rates, such that considerable changes remain unlikely in the short-term future. Very few economists believe that Powell will be influenced by election outcomes, which is why the Fed was given such independence when designed.
  4. On a more long-term basis, it remains to be seen how the increased uncertainty involving US presidential elections impacts the US’ standing in the global economy. This is one basis on which a president can damage the economy through trade agreements and global conflict. The country is heavily dependent on amenable relations with the rest of the world, and animosity from abroad can hurt global trade that is largely beneficial to the country.
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