• Trump closes in on Harris’s lead in the polls
• Neck and neck race spurs market jitters
• Outcome still hinges on battleground states

Trump narrows the gap

The time for Americans to vote for a new president is drawing ever closer, but who will win on November 5 is looking a lot less certain now than it did when Vice President Kamala Harris entered the race. Whilst Harris is still ahead in most opinion polls, her lead has narrowed significantly over the past ten days, with Donald Trump enjoying a sizeable surge in voting intentions.

Key policy differences

Not a lot has changed on the policy front when it comes to the two candidates’ agendas since our last report. Trump is proposing big tax cuts across the board while Harris is prioritizing low-income workers and small businesses. Harris’s other economic proposals include support for first-time home buyers and an end to price gouging for groceries.

Trump has no specific policies on the cost-of-living crisis but has promised to “end inflation” and lower interest rates, raising question marks about the Fed’s independence under a second Trump term. But this may be quite a difficult challenge to achieve for Trump given that higher tariffs are a central part of his campaign.

On immigration, Trump is promising mass deportations of illegal entrants, forcing Harris to toughen up her position as well, with a crackdown on asylum claims. There’s little differentiating Harris from Biden on foreign policy, while Trump thinks he can negotiate quick deals to end the wars in Ukraine and the Middle East, marking a return to his isolationist stance.

Abortion and climate change make the list

Climate change and abortion are other notable hot topics in the 2024 election campaign. Abortion is perhaps Trump’s weakest point that will probably cost him significant votes, but it is a winning point for Harris, who is a staunch defender of abortion rights.

On energy, Trump wants to encourage more oil and gas drilling and questions the scientific evidence on climate change. But whilst Harris is all for renewable energy, she has backtracked on her opposition to fracking and no longer supports a mandate for electric vehicles.

Who controls Congress matters

All in all, there is quite a bit of ambiguity in both candidates’ policies, even on taxes. For example, Trump’s proposal to cut the corporate tax rate to 15% might only apply to companies that manufacture their goods in the US, while Harris wants to extend the 2017 tax cuts set to expire in 2025 only to those earning less than $400,000.

But the biggest uncertainty is that the policies that will eventually get through Congress will depend on the composition of the Senate and the House, as well as the state of the country’s finances. For financial markets, this will be the more important outcome.

Markets prefer a split Congress

A split Congress with either Trump or Harris as president is seen as the safest result for investors, as Republicans would almost certainly rein in uncontrolled spending by a Harris administration, and Democrats are unlikely to back unfunded tax cuts by Trump 2.0.

However, should Republicans gain control of both the House and the Senate, Trump would be able to easily push through his proposed tax cuts while slashing spending. But the spending cuts are not projected to match the scale of tax reductions, leading to a worrying rise in the budget deficit at a time when America’s mounting debt level is already more than 120% the size of its GDP.

On the other hand, a ‘Blue Sweep’ by the Democrats is the least likely outcome. Hence, there’s little prospect of Kamala Harris’s plans for higher corporation and capital gains taxes ever seeing the light of day, as Republicans would never support them.

Inflation risk with Trump presidency

On the whole, though, investor enthusiasm for the Republicans isn’t quite as strong as it was in the previous two elections with Trump as their nominee, primarily due to concerns about US debt and inflation. Trump’s recent revival in the polls triggered a selloff in US and global bonds on the expectation that his policies of higher tariffs and lower taxes would be inflationary while raising government borrowing.

With Treasury yields subsequently surging, the US dollar is strengthening even before Trump has taken office. The longer-term outlook for the greenback is also bullish under a Trump presidency, although it’s likely to be more volatile, especially in the immediate aftermath of the election as investors process the result.

Democrats less of a boost for the dollar and stocks

However, should Harris pull off a win, the initial reaction could be a reversal of the dollar’s latest rally. Its longer-term prospects would also be less bullish than in a Trump presidency, although possibly not as bearish as some of the forecasts suggest. If Harris were to successfully pass most of her proposals for helping low- and middle-income earners, the boost to consumption and therefore to the economy would not be too dissimilar to that from tax cuts.

Risk assets also stand to benefit more from Trump and a Republican-controlled Congress than from a Harris administration, although the picture isn’t so clear. Wall Street would broadly gain from a cut in the corporate tax rate and less regulation. But if the tax cuts fuel inflationary pressures and the situation is made worse by an increase in tariffs, not just on Chinese imports but on all imports, stocks will struggle to rally if higher prices keep the Fed from cutting interest rates.

Energy under the spotlight

However, within the bearish scenario for equities, there are sectors that would probably continue to perform well such as energy and defence.

If Harris were to enter the White House, green energy stocks would likely do better than oil and gas stocks, and the tech sector might benefit too despite the risk of greater regulation. Moreover, the stock market generally would be lifted by Fed rate cuts under the Democrats as inflation and out-of-control borrowing would be less of a threat, while Harris’s more predictable nature compared to Trump’s might also be more positive for Wall Street.

Mixed outlook for commodities

For commodities, there’s no clear-cut outcome either. A stronger dollar under Trump might pressure gold, but the political uncertainty he would generate would surely stoke safe haven demand. If Harris wins, a continuation of gold’s bullish trend is more certain.

Meanwhile, oil would probably enjoy greater demand from a potentially stronger economy if Trump cuts taxes, but greater supply expectations from more drilling could offset some of the gains. Whereas, with Harris, there is some confusion as to how far she would go in opposing new fossil fuel projects and in reality, not much may change from Biden’s policies.

A win-win for cryptos?

One of the biggest reactions to the shifts in opinion polls has been in cryptocurrencies. Trump’s pro-crypto stance threw a lifeline to bitcoin and other digital currencies after the ETF-driven rally faded.

More recently, bitcoin is on the rise again, not just from Trump’s gains in the polls but also from Harris’s plan to introduce a regulatory framework for cryptos. Whilst this may not be as much of a boost to the industry as Trump’s ideas, it would nevertheless increase confidence in digital assets. Thus, it seems that the 2024 election campaign has been broadly positive for cryptos.

Swing states hold the key

As we get closer to Election Day, there is increased focus on the swing states that look set to determine who will get to sit in the Oval Office. The seven swing states are Arizona, Georgia, Pennsylvania, Michigan, North Carolina, Nevada and Wisconsin.

Most polls indicate Trump seems to have an edge in Arizona and North Carolina, and Harris is ahead in Nevada and Wisconsin. Interestingly, Harris’ ability to raise a record amount of funds, far outstripping the donations to Trump, doesn’t appear to be aiding her much in the final days of campaigning. Betting markets and many investors are putting the odds in favour of Trump.

Will Trump challenge the results?

But the polls keep changing day-to-day, making this one of the tightest races ever and raising the prospect of the Trump team contesting the results should Harris win by a very slim margin. This is the worst-case scenario for the markets, one that could drag on for weeks, if not months, creating political uncertainty in the United States at a time of heightened geopolitical tensions globally.