• Harris takes the lead in most polls as Trump’s campaign stalls

• But what does a Harris win mean for stocks and the US dollar?

• Can Trump turn things around and what would investors prefer?

Late entry

The US presidential election is drawing ever closer and there can be no doubt that the race heated up after President Joe Biden abruptly dropped out. His vice president, Kamala Harris, was the obvious choice to replace him despite doubts about her electability.

Yet, she managed to steal Donald Trump’s thunder almost immediately after Biden’s endorsement made her the frontrunner to replace him. It didn’t take long for other senior Democrats to give their backing too, and Harris soon had enough delegate votes to secure the party’s nomination. After that, from her pick of Tim Walz as her running mate to the star-studded Democratic National Convention where she was formally nominated, the momentum just kept growing.

Light on policy

However, her campaign hit its first major bump when she gave a lackluster performance in an interview with CNN, providing the Trump team a much-needed boost. More importantly, as the initial euphoria for Harris fades, the focus is shifting back to policy details, or the lack of.

Whilst there are key differences between the two candidates when it comes to hot issues such as immigration, tariffs, foreign policy and tackling climate change, the pros and cons are not so obvious when it comes to economic policies, at least not when it concerns the markets.

Tax cuts vs spending

The Republicans are traditionally the party for lower taxes, while the Democrats tend to support more spending. Looking at their policies, neither candidate is steering away from convention. Trump wants to extend the Tax Cuts and Jobs Act of 2017 from his first term that is set to expire in 2025 and is pledging to make further reductions to the corporate tax rate. Other tax reductions are being floated too.

It's not surprising therefore that the majority of investors favour Trump to win the November 5 election. But from a voter perspective, the advantages are not so clear. For one, the US has been running excessive budget deficits since the 2008 financial crisis and government debt has more than tripled during this period to almost $35 trillion.

America’s growing debt mountain

A Trump victory could see another $5.8 trillion being added to the debt pile over the next decade according to one study by the Penn Wharton Budget Model, whereas Harris’ policies would add only $1.2 trillion.

Failure to tackle America’s growing deficit problem runs the risk of a debt episode similar to what the UK experienced with its mini budget debacle, as it’s doubtful whether markets would be able to turn a blind eye for much longer.

China Trade War II

Another worry is that Trump’s only source of new revenue is higher tariffs (of 10%) on all imports, with those from China being charged 60%. Regardless of whether such a policy would succeed in boosting the onshoring of manufactured goods, the immediate impact would be a jump in costs for domestic producers and retailers, lifting the prices of a whole range of goods for American consumers. This could derail the Fed’s fight against inflation, giving policymakers less scope to cut interest rates.

Hence, there would be significant uncertainties associated with Trump’s tax cuts and tariffs, which is why some businesses might prefer the continuity that a Harris administration would bring. On her part, Harris’s proposals are mostly targeted at helping households with the cost-of-living crisis.

Biden’s mixed economic track record

High inflation has been the Biden administration’s biggest Achilles’ heel, as it’s overshadowed an otherwise good track record on the economy. The problem for Harris, however, is that having served as vice president, she cannot disassociate herself entirely from Biden’s legacy.

Nevertheless, her combined proposals on capping food prices, building more affordable homes, continuing Biden’s reforms on lowering drug prices, and expanding child tax credits and other tax breaks for families and workers may win round quite a few voters.

Potentially a bigger worry for the Democrats than the absence of headline grabbing policies is the risk of a worsening labor market in the run up to polling day. The Fed looks set to begin cutting interest rates at its September meeting, but this may be too little, too late for voters. Even worse, if any deterioration in employment conditions is not matched by downside surprises in inflation, rate cut odds won’t rise very substantially and Wall Street won’t be able to stage much of a rally.

Who will lift Wall Street the most?

The post-election impact on the stock market is also not very clear-cut. Whilst Trump’s proposed tax cuts would likely be positive for consumers, the boost would be limited if the reductions are targeted mainly at the rich. His stance on corporation tax is also aimed more at big businesses.

This is in sharp contrast to Harris’s focus on supporting the middle class as well as smaller businesses when it comes to tax relief. However, even if the real economy were to benefit more from Democratic policies than Republican ones, Harris’ proposed increase in the corporate tax rate from 21% to 28% alone could be a significant drag on Wall Street shares.

The race for Congress

In reality, the extent to which either candidate will be able to enact all their proposals will depend on how the composition of Congress changes after the election. The Democrats currently control the Senate, while the Republicans have a majority in the House of Representatives.

If Trump wins but the Republicans do not control Congress, the tax cut plans might have to be scaled down and some sort of compromise would have to be reached with the Democrats, for example, not to lower the corporate tax rate.

But if Harris becomes the next president and Congress is split, it will be difficult for the Democrats to pass any bills containing tax hikes on the wealthy and some of the tax credits and spending increases might have to be financed by savings elsewhere to receive the backing of Republicans.

Dollar bulls might prefer Trump

What all this means for the US dollar is that a Republican-led Congress is likely to be inflationary due to looser fiscal policy and higher tariffs, forcing the Fed to maintain restrictive monetary policy. Trump’s promise to clamp down on illegal immigrants could also stoke inflation by rekindling wage pressures.

All this would create a bullish backdrop for the greenback. Equities would be bolstered too by lower taxes, that is until higher tariffs kick in and inflation starts to cause fresh headaches for the Fed.

However, a victory for Kamala Harris and the Democrats would almost certainly keep the Fed on an easing path, placing the dollar under fresh selling pressure. Yet, a relatively tighter fiscal policy might not be the best environment for stocks to thrive, although rate cuts and a soft landing could eventually revive the rally on Wall Street.

Gold and oil take different sides

Not to forget the implications for key commodities such as gold and oil. Gold is less likely to maintain its record-setting streak under a Trump administration as interest rates would not be cut as much and may even rise again, hurting the appeal of the non-yielding yellow metal.

But oil might perform better despite Trump’s pledge to encourage more production of fossil fuels, which would weigh on prices. Oil futures could benefit from the greater demand generated by a potentially stronger US economy. Meanwhile, Trump’s tougher stance on Iran as well as his unwavering support for Israel carries some risks, possibly inflaming geopolitical tensions and pushing up oil prices.

That’s not to say that there wouldn’t be any danger of a geopolitical escalation with the Democrats remaining in power. But a more modest fiscal boost as well as the ongoing efforts for a ceasefire in Gaza would alter little from the current demand outlook for oil.

Cryptos and the Trump trade

With many of the policies laid out unlikely to be fully shaped until once a new administration is in place, most investors will probably stick to the view that Trump is more pro-business than Harris and therefore his return to the White House would be positive for risk assets. And whilst Trump’s economic policies have a slimmer edge over his rival this time round than in previous elections, some investors may find individual stock sectors or assets that fall under the ‘Trump trade’ more attractive.

Cryptocurrencies and crypto-related stocks are a surprise inclusion in the Trump trade. During his first term as president, Trump did not hide his disapproval of cryptos. But he has seemingly made a U-turn, becoming one of the industry’s most ardent supporters. Harris has signaled she also favors further growth in digital currencies, although it’s not clear whether she would take a laxer stance on regulation than Biden.

Will election fever grip the markets?

With election day fast approaching, further surprises cannot be ruled out as Trump and Harris ramp up their campaigns and investors start to pay closer attention to the opinion polls, particularly in the battleground states. But the fact that Trump did not manage to swing the pendulum back towards him after the first and only televised debate between the two hopefuls indicates that it will be tough for the Republicans to regain momentum.