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3 Ways the U.S. Election Could Affect Investors

Jul 10, 2024

As the 2024 U.S. election approaches, potential policy changes in taxes, tariffs and immigration could have important implications for your portfolio.

Author
Lisa Shalett
Lisa Shalett

Key Takeaways

  • In the event of a GOP victory in the U.S. election, a potential extension of 2017 tax cuts could contribute to higher interest rates that may weigh on corporate profits and stock valuations.
  • Tariffs could interrupt recent progress toward curbing inflation in the U.S., potentially exacerbating consumer pain from high prices.
  • Proposals to curb immigration could slow U.S. population gains that economists say have supported economic growth and disinflation.
  • Investors should consider adding portfolio exposure to business sectors such as energy, telecommunications and utilities, while focusing on investments that offer growth at a reasonable price. 

For months, polling data for the U.S. presidential election indicated a deadlocked race, but just recently, the Republican candidate has appeared to widen his lead against the Democratic incumbent.1

 

Bond markets are reacting to this shift, as implied Treasury bond volatility (measured by the ICE BofAML MOVE Index) spiked following the June 27 presidential debate. By contrast, major stock indices have continued to rise to new all-time highs, suggesting that equity markets may be shrugging off recent political developments. Morgan Stanley’s Global Investment Committee, however, believes investors cannot afford to be complacent about potential policy changes—especially at a time when the sustainability of U.S. debt is in question, the economy is slowing and the Federal Reserve is still seeking evidence that inflation is under control.

 

Current GOP proposals could have significant implications in three areas if Republicans prevail in the 2024 presidential and congressional elections.

  1. 1
    Tax Cuts

    If Republicans sweep the November election, the 2017 Tax Cuts and Jobs Act—which reduced corporate and individual tax rates, and expires at the end of 2025—may be extended and potentially enhanced. Morgan Stanley strategists project that the Act’s extension could add about $1.6 trillion to federal deficits over the next decade.

     

    Additional deficits are a critical issue with interest rates at their current levels, since the cost of servicing Treasury debt has nearly doubled over the past two years. As federal debts and deficits expand, inflation-adjusted interest rates rise, which would likely put pressure on U.S. corporate profits and equity valuations.

  2. 2
    Tariffs

    Current GOP proposals include wide-ranging trade barriers, potentially against historic allies and partners like Mexico, Canada and the European Union.

     

    Historically, tariffs have driven a one-time jump in prices as well as a disruption in supply chains that distorts near-term growth. As a result, tariffs could interrupt recent progress toward curbing inflation, potentially exacerbating consumer pain and raising the prospect of “stagflation,” i.e., persistent inflation amid stagnant growth.

  3. 3
    Immigration

    Morgan Stanley Chief U.S. Economist Ellen Zentner and other researchers have noted that the surge of more than 3 million immigrants to the U.S. in 2022 and 2023 has had dual economic benefits: higher population growth and positive labor supply. This has helped drive higher GDP growth, stabilizing housing prices and lower wage costs, which has contributed to the reduction in inflation.

     

    Radical action on the border, as suggested in some proposals, could slow the growth of the U.S. working-age population, potentially weighing on the economy and reigniting wage-based inflation. 

Portfolio Implications

Considering all of these factors, portfolio adjustments may be in order.

 

Investors should think about adding what could be leaders in a Republican-sweep scenario, such as energy, telecoms and utilities.

 

Also, consider positioning portfolios defensively, with a focus on investments that offer growth at a reasonable price, in areas like health care, industrials, aerospace and defense, select power generation and grid infrastructure, financials and residential real-estate investment trusts (REITs).

 

Additional exposure to Japan, gold, hedge funds and investment-grade credit may also be beneficial.

 

This article is based on Lisa Shalett’s Global Investment Committee Weekly report from July 8, 2024, “Confronting an Unsustainable Mix.” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report. 

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Footnotes:

1 “Trump Widens Lead After Biden’s Debate Debacle, Times/Siena Poll Finds,” The New York Times, July 3, 2024: https://www.nytimes.com/2024/07/03/us/politics/poll-debate-biden-trump.html

Index Definitions

For index, indicator and survey definitions referenced in this report please visit the following:

https://www.morganstanley.com/wealth-investmentsolutions/wmir-definitions

Risk Considerations

Equity securities may fluctuate in response to news on companies, industries, market conditions and general economic environment.

Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality of the issuer. Bonds are subject to the credit risk of the issuer. This is the risk that the issuer might be unable to make interest and/or principal payments on a timely basis. Bonds are also subject to reinvestment risk, which is the risk that principal and/or interest payments from a given investment may be reinvested at a lower interest rate.

Bonds rated below investment grade may have speculative characteristics and present significant risks beyond those of other securities, including greater credit risk and price volatility in the secondary market.  Investors should be careful to consider these risks alongside their individual circumstances, objectives and risk tolerance before investing in high-yield bonds.  High yield bonds should comprise only a limited portion of a balanced portfolio.

Treasury Inflation Protection Securities’ (TIPS) coupon payments and underlying principal are automatically increased to compensate for inflation by tracking the consumer price index (CPI). While the real rate of return is guaranteed, TIPS tend to offer a low return. Because the return of TIPS is linked to inflation, TIPS may significantly underperform versus conventional U.S. Treasuries in times of low inflation. Yields are subject to change with economic conditions. Yield is only one factor that should be considered when making an investment decision.

International investing entails greater risk, as well as greater potential rewards compared to U.S. investing. These risks include political and economic uncertainties of foreign countries as well as the risk of currency fluctuations. These risks are magnified in countries with emerging markets and frontier markets, since these countries may have relatively unstable governments and less established markets and economies.

Asset allocation and diversification do not assure a profit or protect against loss in declining financial markets.

Investing in smaller companies involves greater risks not associated with investing in more established companies, such as business risk, significant stock price fluctuations and illiquidity.

Stocks of medium-sized companies entail special risks, such as limited product lines, markets, and financial resources, and greater market volatility than securities of larger, more-established companies.

Physical precious metals are non-regulated products. Precious metals are speculative investments, which may experience short-term and long-term price volatility. The value of precious metals investments may fluctuate and may appreciate or decline, depending on market conditions. If sold in a declining market, the price you receive may be less than your original investment. Unlike bonds and stocks, precious metals do not make interest or dividend payments. Therefore, precious metals may not be appropriate for investors who require current income. Precious metals are commodities that should be safely stored, which may impose additional costs on the investor. The Securities Investor Protection Corporation (“SIPC”) provides certain protection for customers’ cash and securities in the event of a brokerage firm’s bankruptcy, other financial difficulties, or if customers’ assets are missing. SIPC insurance does not apply to precious metals or other commodities.

REITs investing risks are similar to those associated with direct investments in real estate: property value fluctuations, lack of liquidity, limited diversification and sensitivity to economic factors such as interest rate changes and market recessions.

Hedge funds may involve a high degree of risk, often engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, are not required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual funds, often charge high fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. Because of their narrow focus, sector investments tend to be more volatile than investments that diversify across many sectors and companies.  Risks applicable to companies in the energy and natural resources sectors include commodity pricing risk, supply and demand risk, depletion risk and exploration risk. Health care sector stocks are subject to government regulation, as well as government approval of products and services, which can significantly impact price and availability, and which can also be significantly affected by rapid obsolescence and patent expirations.

Value investing does not guarantee a profit or eliminate risk. Not all companies whose stocks are considered to be value stocks are able to turn their business around or successfully employ corrective strategies which would result in stock prices that do not rise as initially expected.

Growth investing does not guarantee a profit or eliminate risk. The stocks of these companies can have relatively high valuations. Because of these high valuations, an investment in a growth stock can be more risky than an investment in a company with more modest growth expectations.

Environmental, Social and Governance (“ESG”) investments in a portfolio may experience performance that is lower or higher than a portfolio not employing such practices. Portfolios with ESG restrictions and strategies as well as ESG investments may not be able to take advantage of the same opportunities or market trends as portfolios where ESG criteria is not applied. There are inconsistent ESG definitions and criteria within the industry, as well as multiple ESG ratings providers that provide ESG ratings of the same subject companies and/or securities that vary among the providers. Certain issuers of investments may have differing and inconsistent views concerning ESG criteria where the ESG claims made in offering documents or other literature may overstate ESG impact. ESG designations are as of the date of this material, and no assurance is provided that the underlying assets have maintained or will maintain and such designation or any stated ESG compliance. As a result, it is difficult to compare ESG investment products or to evaluate an ESG investment product in comparison to one that does not focus on ESG. Investors should also independently consider whether the ESG investment product meets their own ESG objectives or criteria. There is no assurance that an ESG investing strategy or techniques employed will be successful. Past performance is not a guarantee or a dependable measure of future results.

Artificial intelligence (AI) is subject to limitations, and you should be aware that any output from an IA-supported tool or service made available by the Firm for your use is subject to such limitations, including but not limited to inaccuracy, incompleteness, or embedded bias.  You should always verify the results of any AI-generated output.

Rebalancing does not protect against a loss in declining financial markets.  There may be a potential tax implication with a rebalancing strategy.  Investors should consult with their tax advisor before implementing such a strategy.

The indices are unmanaged. An investor cannot invest directly in an index.  They are shown for illustrative purposes only and do not represent the performance of any specific investment. The indices are not subject to expenses or fees and are often comprised of securities and other investment instruments the liquidity of which is not restricted. A particular investment product may consist of securities significantly different than those in any index referred to herein. Comparing an investment to a particular index may be of limited use.

The indices selected by Morgan Stanley Wealth Management to measure performance are representative of broad asset classes.  Morgan Stanley Wealth Management retains the right to change representative indices at any time.

Disclosures

Morgan Stanley Wealth Management is the trade name of Morgan Stanley Smith Barney LLC, a registered broker-dealer in the United States. This material has been prepared for informational purposes only and is not an offer to buy or sell or a solicitation of any offer to buy or sell any security or other financial instrument or to participate in any trading strategy.  Past performance is not necessarily a guide to future performance.

Morgan Stanley Smith Barney LLC, its affiliates and Morgan Stanley Financial Advisors do not provide legal or tax advice.  Each client should always consult his/her personal tax and/or legal advisor for information concerning his/her individual situation and to learn about any potential tax or other implications that may result from acting on a particular recommendation.

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