Jim de Bree | Election from an Investor’s Perspective

Jim de Bree
Jim de Bree

On June 18, my investment advisor conducted a webcast for its clients about the 2024 elections from an investor’s perspective. Although the presenters discussed the election primarily in the context of correlating economic data to previous election results, they also touched on other related post-election issues as well. 

The U.S. election needs to be considered in a global context wherein 40% of the global population lives in countries that will have elections in 2024. Those countries represent 70% of the global capital markets. There is a global trend toward populism away from the globalization that has manifested itself over the past decades. The economic result is likely to be an emergence of global economic protectionism and tariffs.  

The U.S. election is essentially a referendum on the speed of de-globalization. Tariffs have a huge impact on global trade. Therefore, our election could impact China and Mexico, whose economies are a significant part of the global supply chain of goods purchased by Americans.  

With respect to the U.S. elections, the next couple of months are likely to be the most important as early voting will begin in some jurisdictions as soon as September. Typically great prognosticators of election results, financial markets are showing an extremely close election that is very fluid. Some indicators favor a Donald Trump victory while others may indicate Joe Biden can turn things around. 

Several interesting indicators were presented in the webcast. 

Since 1944, in each election year when the incumbent president is running for re-election, the S&P 500 Index has increased. The average increase is 16%. Even when the incumbent is not re-elected, the S&P increases an average of 13%. As of June 18, the S&P 500 has increased 11.4% year to date.  

Again, since 1944, every president who has avoided a recession in the 24 months preceding the election date has been re-elected. Conversely, every president who experienced a recession during that period has lost. To date, President Biden has not had to deal with a recession. However, whenever the interest on government debt exceeds 14% of gross domestic product, the economy tanks. In recent months interest expense has exceeded that threshold, so there are likely to be economic headwinds in the near future. 

In 1980, President Ronald Reagan coined the term “misery index,” which is the sum of the inflation rate and the unemployment rate. Since 1980, when the misery index exceeded 7.35%, the incumbent always lost. As of May, the misery index stands at 7.27%. Thus, a small increase in either the rate of inflation or the unemployment rate will put Biden in the danger zone.  

What these data points show is that when the election is a referendum on the incumbent’s presidency, the incumbent loses. When a president’s approval rating is below 45%, the election is considered to be a referendum. Biden’s approval rating is currently 38%. The question is whether Biden can do enough to increase his approval rating above the 45% threshold. At this point in his term, President Trump’s approval rating was 43%. 

The election clearly will be decided in the swing states. The webcast’s presenters mentioned that the Five-Thirty-Eight polling data presently show that Trump is ahead in enough swing states to indicate a Trump victory in the Electoral College. However, there is a 10%-15% chance of each candidate getting 269 votes (one short of the 270 needed to win), causing the election to be decided by the House of Representatives. In such an election, each state gets one vote and 27-28 states will have a majority of Republican representatives. 

Whoever wins the election, Congress and the executive branch will have to deal with significant economic issues in 2025, starting with raising the debt ceiling in January. 

Many of the 2017 tax provisions expire at the end of 2025. Republicans want to reduce the corporate tax rate to as low as 15%, while the Democrats want to increase those rates to 28%. It will cost trillions to extend most of the non-corporate tax cuts.  

Despite the election rhetoric, tax increases are inevitable to service the national debt. Will Congress choose to raise tariffs or impose a value added tax? Neither of those will require the American taxpayer to write a check to the IRS because the tax increase will be embedded in the price of goods and services. The 2025 tax law changes will probably be the biggest tax policy change since 1913 when the income tax was enacted. 

The webcast presented much food for thought. This election’s economic consequences will likely affect American finances for years to come. 

Jim de Bree is a Valencia resident.

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