A last check on the presidential and congressional races, and their investment implications
With only days left until November 5, we think the 2024 U.S. presidential race remains too close to call. Vice President Kamala Harris appears to have lost some of her post-September 10 debate momentum, but the race was still a toss-up in late October.1
From an economic standpoint, several factors could provide key tailwinds for either candidate during this final stretch. Harris may benefit from strong economic growth, a resilient labor market, slowing inflation, and a near-record equity market.2 Increased geopolitical tensions — particularly in the Middle East — could play to former President Donald Trump’s advantage as volatility and oil prices rose in October. However, hard-to-price social issues cloud the picture and make voter turnout even more unpredictable than usual, perhaps overshadowing economic issues in ultimately determining ballot decisions.
In such a close presidential race, a few thousand voters across a handful of swing states likely will decide the outcome, as they did in 2020. This is where each campaign has been focusing attention and resources to gain as many incremental votes as possible.
Congressional races and other factors a recipe for more gridlock
Congressional elections are setting the stage for divided government — or at least slim majorities. The House remains a coin flip but probably rides the president’s coattails.3 However, more Democratic than Republican Senate seats are up for reelection, and a number of those Democrats are in states that Trump carried in 2020. Thus, Republicans appear to have an easier path to control the Senate. Democrats (or legislators caucusing with the party) are defending 23 of 34 Senate seats on the ballot.
At most, the GOP only needs to gain two seats to secure a slim majority if Harris wins (or just a single seat if Trump wins). West Virginia already looks set to flip to Republicans as Senator Joe Manchin retires, while Montana also appears likely to flip to the GOP.4 Still, anything is possible in such a close race, so it is not out of the realm of possibility for Democrats to pull off some seat switching of their own. Most notably, GOP Senator Ted Cruz remains in the lead in Texas, but Democratic Representative Colin Allred gained momentum in the polls in October as Democrats focused resources there.5
All in, divided government remains our base case, but our next most likely scenarios are for the GOP to control Congress and the White House or for a divided Congress with a President Harris. Even under single-party government, we see several factors limiting the scope for major new policy implementation. Intraparty divisions and slim majorities should persist, adding to gridlock as factions within each party block legislative initiatives touted during the campaign season. We delve more into these issues in the next section.
As we will show, policy uncertainty is at a 50-year high, at least by some measures. The close presidential race and the likelihood of divided leadership in Congress are only two of the factors that make it very difficult to attempt to reallocate portfolios between now and next January, when a new Congress and a new president take office. But we do believe it is appropriate to look beyond the elections to see what may matter after January. Even if predicting policies is very difficult preelection, the third section of this report identifies markers that capital markets are likely to be watching for once we have new government leaders.
In the Senate, Republicans have the mathematical advantage and only need to gain two seats to secure a slim majority if Harris wins (or just a single seat if Trump wins).
2025 is filled with time-consuming fiscal debates that must take precedence, adding to intraparty divisions and slim majorities in fostering gridlock and likely preventing negotiations around new policy legislation.
1 For example, see the Real Clear Politics Betting Average, which includes BetOnline, Betfair, Bovada, Bwin, Polymarket, PredictIt, and Smarkets.
2 Third-quarter U.S. gross domestic product growth of 3.4%, estimated by the Atlanta Federal Reserve Bank as of October 18, 2024, remains well above the economy’s 2.0% – 2.5% long-term potential rate.
3 This refers to either presidential candidate attracting votes for same-party congressional candidates.
4 2024 Cook Political Report Senate Race Ratings, October 21, 2024.
5 Ibid.
Markets likely to stay focused on the economy
Throughout this election season, the most sustained movements in capital markets have responded more to economic and interest-rate signals than to campaign promises. For example, the S&P 500 Index Industrials and Financials sectors have outperformed the broad index since July 10, a date that corresponds not to any political event but to the first sub-3% reading on 12-month Consumer Price Index inflation since March 2021. Meanwhile, a number of legal and political obstacles for next year limit or complicate investors’ ability to price in election outcomes and their policy consequences before the new government takes its place:
More than 165 lawsuits have already been filed to contest every facet of the voting process6: More than half of these have been filed in the seven swing states most crucial to the presidential election (Wisconsin, Michigan, Pennsylvania, Georgia, North Carolina, Arizona, and Nevada). More than 40 suits were filed in September alone. These suits contest procedures on voter registration, voter rolls, mail-in ballots, and other issues. If the race remains close, it is difficult to know how long it may be before the results are available.
Small majorities should make for modest goals: We expect that the two parties will share leadership of Congress. Even in the case of single-party control, neither party seems likely to win majorities large enough to force through deeply controversial budget legislation, such as the tax on unrealized capital gains, which Vice President Harris mentioned on the campaign trail.7
Intraparty differences in Congress block legislation: Even when one party controls one or both congressional chambers, dissension has blocked legislation in recent years. Negotiations over the fiscal-year 2024 budget stalled for much of 2024 because of differences within the GOP, which leads in the House. And intraparty dissension was the main reason why each political party failed to pass promised legislation while it controlled Congress and the presidency, Republicans in 2017 and Democrats in 2021.
Renewed debt-ceiling drama is set to complicate compromise: We expect next year will be filled with time-consuming fiscal debates that must take precedence, limiting or preventing progress around new policy legislation. First, fiscal-year 2025 appropriations bills must be prioritized to avoid government shutdowns. Second, the debt ceiling’s current suspension lapses on January 2, 2025. Congress can rely on extraordinary measures to stretch the Treasury's available cash and to temporarily fund government operations, but a new debt limit likely will need to be negotiated by mid-2025.8 For investors, there is also the uncertainty that debt-ceiling deals typically require many tax and spending compromises, and it is very difficult to know until next year how Congress will craft the deal.
Predicting the number of market-moving executive actions just became harder: Regulations have been a key focus for recent presidents, as they can usually be more easily changed than passing new legislation. Chart 1 shows selected targets of regulatory actions carried out by both the Trump and Biden administrations. The Energy, Health Care, and Financials sectors were key targets for tighter regulation under Biden and looser under Trump.
Chart 1. Significant number of regulatory actions under Presidents Biden and Trump
Sources: Brookings Institute and Wells Fargo Investment Institute, as of August 9, 2024. A regulatory action refers to a new rule or order passed, the removal of a rule or order, or the removal and replacement of a rule or order.
However, regulations and executive actions may be more difficult in coming administrations. On July 28, 2024, the Supreme Court overturned a legal precedent known as the Chevron deference doctrine, by which judges gave the executive branch wide latitude to interpret laws for regulatory purposes.9 The new ruling rescinds that latitude. We expect to see fewer market-moving executive orders than illustrated in the chart until investors see how the courts will apply this new precedent. The implication applies not only for equity markets but may also limit a president’s ability to impose tariffs.10
Surveys provide a way to confirm how policy uncertainty creates added economic uncertainty for businesses. The National Federation of Independent Business surveys its small-business members about their perceived degree of uncertainty. Chart 2 plots the uncertainty index levels since 1988. The vertical bars call out the August-to-October period during presidential election years and help illustrate that the index tends to spike higher in those months. The latest readings available (August and September 2024) mark the highest uncertainty in survey history, back to 1974.
Chart 2. Small-business uncertainty peaks during election season and reached a record high in September 2024
Sources: Bloomberg and Wells Fargo Investment Institute. Monthly data, January 1988 to September 2024. Shaded areas represent the months of August to October during presidential election years. The index is the NFIB Uncertainty index, which gauges small-business uncertainty 3-6 months ahead, based on surveys of National Federation of Independent Business members.
In our view, this record-high level of uncertainty around this election illustrates financial market reluctance to price in market preferences based on campaign promises. The caution is likely not only from a presidential race where the polling is neck and neck, where the candidates offer high-level policy ideas but few details, where more congressional gridlock is likely, where a new legal precedent could confound executive actions, and where the debt-ceiling debate probably multiplies the potential compromises available across all the campaign promises heard on the stump but also about the path and timing of Federal Reserve interest-rate cuts, which is particularly important for the small-business owner’s cost of credit.
While these obstacles create uncertainties ahead of the new government taking office, they do provide useful mile markers for investors to use after the elections to determine what — and more importantly when — policy may have an impact on particular sectors. We consider that next.
Congress is passing fewer bills — a record low of 27 in 2023 — with political polarization a popular culprit.
Source: “US Congress Productivity,” Reuters, March 12, 2024
In the first three months of their presidencies, President Biden issued 21 executive orders revoking 67 total prior orders and President Trump issued 8 executive orders revoking 13 prior orders.
Source: “Biden in Action: The First 100 Days,” The American Presidency Project, UC Santa Barbara, April 30, 2021
6 “More than 165 Lawsuits Are Already Shaping the 2024 Presidential Election,” Bloomberg, October 15, 2024
7 Real Clear Politics House and Senate maps, Real Clear Politics, October 10, 2024
8 Dan Clifton, “September Liquidity Squeeze Meets Fed Rate Cuts,” Strategas, September 16, 2024
9 The new high court ruling is formally known as Loper Bright v. Raimondo.
10 A president’s tariff authority rests on statutes that allow the executive to protect U.S. industries against foreign government tactics that block U.S. exports or where dependence on foreign goods threatens U.S. security. Under the new high court ruling, formally Loper Bright v. Raimondo, U.S. courts might rule on whether blanket tariffs on allies or raising the current retaliatory tariff on China (from 25% to 60%) extrapolate too far from the statutes. For more on how the post-Chevron legal environment may apply to tariff policy, please see “The End of Chevron Deference Could Be Good for Free Trade,” The Wall Street Journal, August 27, 2024, and Alan Wm. Wolff, “Would Trump’s Threats of New Tariffs Survive Legal Challenge in the Supreme Court?” Peterson Institute for International Economics, February 16, 2024.
Look past the elections for potential market impacts of the elections
We believe the unknowns in October may resolve or become clearer after January, and we consider the look ahead in this section.
One area we are watching for potential compromise is a possible extension of personal and business provisions of the Tax Cuts and Jobs Act (TCJA) of 2017, the so-called Trump tax cuts. At stake in the extension is a possible increase in individual tax rates and the expiration of favorable estate tax provisions.11 Such a compromise passed the House in 2024 but stalled in the Senate. We believe this compromise is a clear possibility for 2025, although the uncertainties listed above increase the uncertainty around such a deal. Especially for investors considering estate transfers in 2025, we favor consulting with investment, tax, and legal advisors to plan strategies to minimize tax exposure at the end of 2025.
More broadly, what look like obstacles today could resolve and become markers for investment opportunities in equities come early 2025:
Industrials: Trade tariffs would be negative and could arise under either presidential candidate, although the scope outlined by President Trump on the campaign trail has been further reaching. After tariffs, tax rates are a key factor to watch.
Energy: Key factors to watch are how quickly midstream permitting and drilling on federal lands increase.
Financials: Less regulation would be positive, atop a benefit already coming through capital requirements in Basel III endgame, a set of global capital standards that significantly improve the risk-based capital positions of large banks.
Consumer Discretionary and Consumer Staples: The dominant factors for consumer goods are trade tariffs and additional restrictions on Chinese imports.
Health Care: The key differences are in whether to expand the Affordable Care Act (ACA) and in how to help with prescription drug costs. Harris favors expanding federal subsidies for health care, which would favor certain companies in the managed care sub-sector; Trump prefers to find alternatives to ACA. On the other hand, the treatment of Medicare Advantage reimbursement rates and antitrust investigation activity could also be viewed as potentially more favorable in a Trump administration. On drug costs, Harris favors federal mandates to further lower costs (negative for drugmakers), while Trump prefers a more market-driven approach (positive for drugmakers). Much will depend on negotiations with pharmacy benefit managers, middleman companies that negotiate rebates between drugmakers and insurance companies.
Utilities and Materials: The key factor is to what degree environmental regulations tighten or loosen on utility companies.
Information Technology and Communication Services: Regulation is one important factor for technology, especially any antitrust efforts against the large tech firms. In our view, however, the single most important factor is another potential negative — namely, the degree to which a new president limits exports of technology, especially to China.
Small-business support: Both candidates appear to support some reduction in regulation. A tax credit is worth watching for, depending on the compromise deal for the debt ceiling.
There are several overarching caveats. The first is that all these factors represent either headwinds or tailwinds, but we expect the economic recovery and accompanying lower short-term interest rates to dominate market movements and create positive momentum for cyclical sectors (Financials, Industrials, Energy, and Materials) and negative momentum for defensives (Real Estate, Utilities, and Consumer Staples).
The second consideration is that factors that depend on regulation may take additional time to weigh given that the end of Chevron deference could tie up regulatory actions in the courts for long periods. Finally, factors involving additional federal spending could become negotiating items in a debt-ceiling deal that historically takes months to resolve and may involve compromises that are difficult to foresee.
Unless extended, certain provisions of the Tax Cuts and Jobs Act of 2017 expire at the end of 2025. The highest marginal federal personal tax rate reverts to 39.6%, up from 37% today, and the estate tax exemption per decedent falls from $10 million to $5 million.
Source: “JCT Lists Expiring Tax Provisions Through 2034,” Joint Committee on Taxation, January 18, 2023
New U.S. tariffs on China came into effect on September 27, 2024. They include levies on $162 billion in semiconductors, critical metals, electric vehicles, and lithium batteries.
Source: “Why Biden is Escalating Trump’s China Tariffs,” Bloomberg, September 20, 2024
11 For details, please see our report “Rounding Third Base in Campaign 2024,” September 6, 2024
