We still think that gridlock would be the most bullish outcome of the November 5 presidential and congressional elections, making it difficult for the next president to deliver on all the promises he or she made during their campaigns to win the White House. More than half of our Founding Fathers were lawyers. They designed a system of checks and balances that required lawyers to get anything done and even made it hard for them to do so without clear support of the three branches of government!
A sweep by either the Democrats or Republicans might confuse the equity market. Initially, a Harris sweep might be more bearish than a Trump sweep because the former promised to raise the corporate tax rate and the capital gains tax rate, and even tax unrealized capital gains. Kamala Harris also supports maintaining and strategically using tariffs, but not blanket tariffs that could rise prices for American consumers.
Donald Trump, on the other hand, has proposed imposing a 60% tariff on goods from China and a 20% tariff on all other imports. However, these are probably initial bargaining positions of the dealmaker if and when his trade representatives negotiate with the major US trading partners. Furthermore, he seems inclined to cut taxes and deregulate business more broadly than Harris. He also aims to increase US energy production to lower energy prices and to attract more manufacturing to the US.
A sweep by either party will almost certainly unnerve bond investors, who can anticipate higher federal government deficits and more debt either way. A backup in bond yields would be bearish for stocks unless it is attributable to better-than-expected economic growth once the uncertainty of the election is over.
Most unnerving for all of us and the financial markets would be a bitterly contested close election.
The good news is that the tit-for-tat escalation of the direct war between Israel and Iran might pause for a while after Israel's latest retaliation. The price of a barrel of Brent crude oil fell by almost 5% tonight after Israeli airstrikes spared Iran’s oil facilities (chart).
