Institute Alert

• The U.S. presidential election likely will be decided a by few thousand voters across a handful of swing states, while we expect the congressional races to produce divided leadership in Congress – in other words, our base case is for divided government.
• Delayed election results have not been uncommon since 2000, and even in earlier decades, but initial market unease over such uncertainty has tended to fade quickly as the economy reasserts itself as the main driver of inflation and expected earnings.

• This report is really a pre-Election Day primer, the first in a series of election week reports to track what to watch and how to interpret the reactions in capital markets after Election Day.

With an end to Campaign ’24 fast approaching, we offer investors a Q&A guide to Election Day that includes key races and issues to monitor, a timeline of post-election developments, and a brief review of issues as campaigns conclude.

• November 5, 2024: Election Day
• By December 11, 2024: States issue Certificates of Ascertainment for electors
• December 17, 2024: Electors vote in their states
• December 25, 2024: Electoral votes arrive at the Archivist’s office in Washington, D.C.
• On or before January 3, 2025: The Archivist transfers the Certificates to Congress
• January 6, 2025: Congress counts the electoral votes, and the vice president, as President of the Senate, presides over a joint session of Congress to count the electoral votes and announce the results
• January 20, 2025: The new president and vice president are inaugurated

The U.S. presidential election likely will be decided by a few thousand voters across a handful of swing states, where average poll results on the eve of the contest reveal a dead heat.² Seven battleground states hold a total of 93 of the 270 Electoral College votes needed for victory (electoral votes in parenthesis): Arizona (11), Georgia (16), Michigan (15), Nevada (6), North Carolina (16), Pennsylvania (19), and Wisconsin (10).³ Vice President Kamala Harris’ most likely path to victory would be the “blue wall” states of Michigan, Pennsylvania, and Wisconsin, along with Nebraska’s 2nd congressional district, while former President Donald Trump’s likely path to victory would be some combination of Arizona, Georgia, Nevada, and North Carolina, along with at least one “blue wall” state.⁴

Democrats or independents caucusing with the party are up for re-election in 23 of the 34 contested Senate seats, including several in states that Trump carried in 2020. That leaves them more exposed to losing their current majority. We believe that the Republicans will secure a majority in the Senate, and possibly 54 or 55 seats. We expect party control of the U.S. House of Representatives to track with the historical pattern of following the party that wins the White House.

We ground these expectations in the increased tendency toward straight-ticket voting observed in recent elections. For example, in 2016, every state that elected a senator chose the same party for that Senate seat and the presidency. In 2020, GOP Senator Susan Collins of Maine was the only senator whose party affiliation differed from that of the presidential winner.⁵ In that same year, only 4% of House-district votes differed in party affiliation from the president.⁶

Based on a Republican-controlled Senate and the House majority to match the presidential contest winner, we foresee two scenarios:

• Our base case: divided government: In this scenario, Harris wins the presidential race, but the parties share congressional leadership.
• A Republican sweep: Modest margins in the Senate and the House should allow for leaders to allow limited intra-party dissent on issues, in our view, but the GOP is unlikely to reach the 60-seat threshold to end a filibuster.

In 2020, it took until the Saturday after Election Day to complete the vote count in Pennsylvania, which locked in a win for President Biden. In 2024, election night may or may not confirm the tight polls. If even a few thousand voters switch or leave the “undecided” category, one candidate may accumulate an insurmountable Electoral College lead overnight. Alternatively, the dead heat in the polls may become a tight race, while some combination of swing states completes the vote counting. A close race also may trigger lawsuits that demand recounts or checks for fraud, or extra time may be needed to tabulate the large number of early and mail-in votes.⁷ Previous legal challenges have equipped state officials and local election boards to delay election certification via new laws empowering local boards to investigate voter fraud, for example.

From a financial market perspective, financial market volatility can accompany delays after Election Day but has tended to fade as the economy typically quickly reasserts its role as the main driver of expected earnings. Some examples:

• The 1960 election: There were no post-election challenges to Democrat John F. Kennedy’s narrow (0.17%) margin of victory in the popular vote, probably because of his comfortable, 84 electoral-vote advantage giving him the presidency. The S&P 500 Index rebounded from an October 1960 low, probably more in anticipation of a February 1961 recovery following a 1960 recession.
• The 2000 election: This controversial election, not resolved until a mid-December Supreme Court ruling, had little impact on a stock market already in an extended decline from a March 2000 bursting of the tech bubble, triggered by the lagged response to the Federal Reserve’s (Fed’s) year-long credit tightening through May 2000.
• The 2020 election: The stock market’s rise into the 2020 election and through its uncertain aftermath was driven by a strong economic recovery, triggered by its reopening following the deep, COVID-related slump in February – April. President Biden’s popular-vote margin of 4.3% was considerably wider than Kennedy’s in 1960, and the electoral margin of 74 votes was nearly as great. Still, uncertainties created by the large number of mail-in votes four years ago could foreshadow doubts in the 2024 election.

Under our base case of divided government, we believe that complex and partisan legislative initiatives that carry many provisions are most likely to generate dissent between the House and Senate and complicate passage. For example, compromise on budgetary and debt-ceiling legislation should be challenging between the two chambers of Congress. Likewise, campaign 2024 promises that appeal to only one party are likely to face difficult passage.

2025 budget

The continuing resolution will be front and center because of a December 20, 2024, expiration date that risks a disruptive government shutdown before 2025 begins. Budget provisioning may be easier under single-party control, but either party that wants large, new spending initiatives may find its proposals drawn into a larger and protracted debt ceiling debate.

Debt ceiling

Reinstatement of the federal debt ceiling, on January 2, 2025, should challenge the negotiating skills of a new Congress. The large projected deficits that the Congressional Budget Office projects complicate the challenge. What’s more, the campaign proposals offered by both presidential candidates suggest priorities for additional spending, even if they differ on tax policy. Investors will be watching closely to see if a debt ceiling compromise widens the deficit significantly.

Tax reform

While broad, new tax initiatives seem improbable (for example, Harris’ proposal for a higher corporate tax rate and a tax on unrealized capital gains), even the closely divided current Congress has expressed interest in extending provisions of the Tax Cuts and Jobs Act of 2017 that are due to expire at the end of 2025. The 2024 House compromise extended and reduced the top-tier personal income tax rate, lifted the estate tax exemption, and provided small-business support, in exchange for child tax credits. That House bill failed in the Senate, but Republicans are likely to push again to extend those 2017 tax benefits. Trump may push for additional tax cuts, particularly if Republicans control both chambers of Congress, but, again, these may become caught up as negotiating points in the broader debt-ceiling debate.

Tariffs

Tariffs are likely to top the new president’s policy agenda, mainly because the president has certain authority from Congress to implement tariffs unilaterally (without seeking congressional approval). Both presidential candidates favor new tariffs on Chinese imports, although Trump has proposed larger China levies and favors additional tariffs on imports from all other countries.

Immigration

Immigration is among the issues with the most clearly defined differences between the two candidates. Both candidates have spoken favorably about a border wall, but Trump favors deporting undocumented immigrants.

Regulation

Regulation is another issue with much on the line because of deep philosophical differences between the two candidates. Harris’ bias toward tight antitrust and other controls on the private sector contrast with Trump’s calls for a freeze on new regulations.

Stay tuned for additional insights from us. Our Election Day report edition will dive deeper into likely election outcomes, when investors may know the results, and market-related impacts. We are planning other reports for the day-after Election Day and beyond, as capital markets negotiate a complex sequence of conclusions to Campaign ’24.

¹ “Electoral College timeline of events,” National Archives, August 7, 2023.

² Average poll results show neither candidate leading in any of the seven swing states by more than 1.9%, within the margin of error. See Harris vs. Trump polls, The Hill/Decision Desk HQ, October 29, 2024.

³ “2024 Presidential election interactive map,” 270towin.com, October 26, 2024.

⁴ Nebraska and Maine are the only two states where electoral votes are not winner-take-all. Two of each state’s electoral votes are allocated to the statewide popular vote winner, but the other two electoral votes in Maine and other three electoral votes in Nebraska are allocated by congressional district winner.

⁵ See “Is Ticket-Splitting Back?” Politico, May 29, 2024.

⁶ Harry Enten, “The House and Senate could make history this election,” CNN, October 22, 2024.

⁷ Zoe Tillman and Raeedah Wahid, “More than 165 lawsuits are already shaping the 2024 U.S. presidential election,” Bloomberg, October 15, 2024.

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