Strategy Focus - US elections: background and potential market reaction

US elections : background and potential market reaction
 
The presidential elections in the United States will take place on November 5. This note develops the exceptional economic context in which this event is taking place. It recalls the modus operandi of these elections as well as the programmes of the main candidates. Finally, it presents the potential short- and medium-term impacts on the financial markets.
 
Outperformance of the US economy. The US economy has been growing strongly since the Covid crisis, having quickly made up for the losses of this crisis and widening the gap with developed economies. This outperformance can be explained by massive fiscal packages during the Covid crisis, sound private sector balance sheets, a low impact of the conflict in Ukraine and a rebound in productivity.
 
Twin deficits, the price to pay for the outperformance. The flip side of this outperformance the sharp deterioration in the budget deficit and the current account balance. The fiscal deficit is expected to remain high in a context of large mandatory spending and likely loose fiscal policy over the next few years. The external deficit is also expected to remain high, in a context of strong demand for goods and a sharply rising cost of external debt
 
A soft landing in 2025. The US economy is expected to slow down in 2025 compared to the very strong pace of recent years. The slowdown would reflect a less dynamic labour market in terms of job creation and wage growth. Nevertheless, the Federal Reserve's rate cut cycle as well as the sound balance sheets of households and companies should allow the economy to make a successful soft landing.
 
Three elections in one with an uncertain outcome. On Tuesday, November 5, the presidential and legislative elections will take place, with the entire House of Representatives and a third of the Senate at stake. Polls predict very tight results for the presidential election and the House of Representatives. This configuration is essential because a president depends on Congress to be able to implement his policies
 
Harris vs Trump: Important differences but some common ground. Despite a highly polarised campaign, the economic programmes of Kamala Harris and Donald Trump have several points in common: the pursuit of decoupling from China, the continuation of industrial policies and of fiscal easing to support the economy. The main differences on the economic front correspond to their international policies, where Trump is planning very significant tariff increases, regardless of the exporting country. The second difference is institutional, with Trump planning a stronger intervention on monetary policy.
 
Probably modest impact on the financial markets. Historically, the outcome of the presidential elections has had little effect on financial markets. We believe that in the event of a divided government, the financial markets would remain indifferent. In the event of a large Democratic victory, it is likely that the equity markets could have a short negative reaction while in the event of a large Republican victory the equity markets could react positively. What happens next will depend on the inflationary effects of the policies put in place.

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