With less than eight weeks to go until Election Day, the contest between Vice President Kamala Harris and former President Donald Trump remains fiercely competitive.
The race, marked by stark contrasts in policy and style, is centered around seven pivotal swing states.
The results in these states, which have been inundated with advertisements and extensive field operations, will likely determine the next occupant of the White House.
One of the foremost concerns among voters and investors alike is the state of the federal budget.
UBS makes it clear that the outcome of this election is unlikely to resolve the ongoing issue of budget imbalance.
Both Republicans and Democrats acknowledge the unsustainability of current public finances but are divided on how to address the problem.
While Republicans typically focus on cutting expenditures, Democrats advocate raising revenues. Unfortunately, neither approach seems likely to lead to a balanced budget, particularly given the political divisions in Congress.
Beyond budget concerns, the fiscal year 2025 budget negotiations and the looming debt ceiling are set to complicate matters further, regardless of who wins.
The risk of a government shutdown and the reinstatement of the federal debt limit in early 2025 introduce potential financial volatility. Historically, divided governments have struggled to achieve consensus on these issues, often leading to last-minute compromises.
The role of the Federal Reserve in this election year is also under scrutiny. Despite assertions that political considerations do not influence monetary policy decisions, UBS flags that the Fed has adjusted interest rates during 11 of the last 12 election cycles.
While such adjustments have not definitively impacted election outcomes, the markets will undoubtedly react to any shifts in policy.
Recent Supreme Court rulings have also reshaped the regulatory landscape, reducing the power of federal agencies to interpret ambiguous laws.
This could lead to uncertainty in sectors ranging from healthcare to energy, as businesses navigate the potential for deregulation or increased oversight depending on the election results.
Energy policy is another focal point, especially given the Inflation Reduction Act (IRA) of 2022, which represents the largest US investment in clean energy.
A Harris administration would likely uphold the provisions of the IRA, whereas a Trump administration might seek to scale back or adjust its focus, particularly with respect to electric vehicle incentives.
However, UBS notes that even in a “Red Sweep” scenario, full reversal of the IRA is unlikely due to the growing importance of renewable energy in key Republican districts.
On trade policy, the UBS underscores the president’s ability to impose tariffs with few restrictions. Both Harris and Trump are expected to use tariffs as a tool for foreign policy, though Trump would likely employ them more broadly.
Tariffs, while effective in certain cases, can have inflationary effects and disrupt global supply chains, creating further challenges for businesses and consumers.
Foreign policy considerations extend beyond trade. Questions about the US president’s authority to withdraw from international treaties or deploy military forces without Congressional approval are particularly pertinent in this election. While Congress holds significant power over treaty negotiations and declarations of war, recent administrations have exercised broad discretion in foreign affairs.
The next president’s approach to these issues will have far-reaching implications for global alliances and military engagements.
Domestically, immigration policy is a central topic in the campaign, with Trump promising a large-scale deportation effort.
While the executive branch holds considerable authority in this area, UBS notes that practical challenges such as resource limitations may prevent such an initiative from being fully realized.
The balance of power in Congress will also play a critical role in shaping post-election policy. Key Senate races in states like Montana, Ohio, and Pennsylvania will determine whether Democrats or Republicans control the upper chamber, while House races in districts won by Biden in 2020 remain highly competitive.
A divided Congress could limit either party’s ability to implement significant legislative changes, regardless of who wins the presidency.
Polling accuracy has been a topic of much debate following the 2016 and 2020 elections, where results deviated from expectations.
UBS acknowledges that while pollsters have made adjustments, public confidence in polling remains low, particularly with Trump on the ballot.
The accuracy of polls in midterm elections has been more reliable, but the unique dynamics of a presidential election may present different challenges.
Election security, especially around mail-in ballots, continues to be a concern. UBS emphasizes that voting by mail is not a new practice and is generally secure, with very few documented cases of fraud.
Nevertheless, the timely delivery of ballots and verification processes will be critical in ensuring a fair and transparent election.
The potential influence of third-party candidates, while historically limited, is another factor UBS considers. Although notable third-party candidates like Ralph Nader and Ross Perot impacted past elections, Robert F. Kennedy Jr.’s withdrawal from the 2024 race is unlikely to have a significant effect on the outcome.
One unique feature of the US electoral system, the Electoral College, also comes into focus. While the system was designed as a compromise between smaller and larger states, its continued existence sparks debate.
If no candidate secures the required 270 electoral votes, the election would move to the House of Representatives, where each state delegation would cast a single vote, a scenario that could introduce further complexity into the process.
While elections may cause short-term volatility, long-term trends suggest that political party affiliation does not have a significant impact on market performance.
However, sector-specific outcomes may vary. In the energy sector, a Trump administration would likely favor fossil fuel companies, while a Harris administration could focus on renewable energy initiatives.
The financial services industry may benefit from a Trump presidency due to lighter regulatory oversight, while a Harris administration might impose stricter regulations, particularly in areas like consumer protection and banking consolidation.
The technology sector is poised to remain at the center of geopolitical tensions, particularly around semiconductor exports. Both candidates are likely to maintain restrictions on technology transfers to China, though the specifics may differ.
The broader tech industry could experience increased volatility, especially in the hardware and semiconductor sectors, as supply chains shift and tariffs are potentially reimposed.
Tax policy is another area of divergence between the candidates. Trump advocates for making the 2017 tax cuts permanent and lowering corporate taxes further.
Harris, on the other hand, supports tax increases on wealthier individuals and corporations. The ability to enact these changes will depend largely on the makeup of Congress, with a divided legislature making significant tax reform unlikely.
Finally, UBS addresses concerns about the future of the US dollar. While a Harris administration could introduce policies that weaken the dollar, such as higher taxes and increased government spending, Trump’s trade policies and potential for escalating deficits might also undermine the dollar in the long term.
