Disruptor Series Economics Policy & Regulation US Election Blog

How Will Looming US Elections Affect the State of the Markets?

18 October 2024
5 min read

In our latest AB Disruptor Series episode, we take a closer look at the implications of a polarized US electorate on the macro and market landscape.

Historical wisdom holds that US elections don’t really matter for markets. But we argue that they do matter today, given the rise of political polarization. This contentiousness leads to increasingly polarized policies and—ultimately—increasingly polarized winners and losers. That’s the focus of our most recent AB Disruptor Series podcast. Here’s a brief summary of the discussion.

The Rise of Polarization and a Shifting Political Axis

The economic seeds of today’s polarization were planted in a rollercoaster experience for Americans. After the US slogged through the stagflation of the 1970s economic malaise, the 1980s saw the intersection of globalization, technology and automation, and demographics begin to take hold. Inflation fell, interest rates came down, and both stocks and bonds roared.

Decades of strong capital market returns—particularly from the early ’80s through the tech bubble—drove substantial financial success for owners of capital. But a painful byproduct of the globalizing, tech- and finance-driven world was taking shape: rapidly growing wealth and income inequality. The “little guy”—the bottom half of the US income distribution—went from the biggest winner in the three decades pre-1980 to enduring more than three decades of stagnating real income post-1980.

In recent elections, including many outside the US, parties’ respective policy platforms offered different prescriptions to treat that one disease—wealth and income inequality. In the northwest quadrant of the Display below, at a high level, the populist Democratic solution focuses on big-state wealth redistribution. In the northeast quadrant is the populist Republican prescription of paring back globalization, closing the border and domesticating supply chains.

Why Does Inequality Matter? It Dictates the Policy Regime
Policy platforms of different axes of the US political spectrum

For illustrative purposes only.
As of  September 30, 2024
Source: AllianceBernstein (AB)

Common Side-Effects of Policy Prescriptions

If we assess potential 2024 election outcomes and the policies likely to result, the potential side-effects will likely be similar—more debt, higher inflation and less efficient growth. From a growth perspective, the two biggest moving parts are the fate of the expiring Tax Cuts and Jobs Act (TCJA) and tariffs. 

A Republican sweep (Display) would likely see the TCJA fully extended, with more cuts possible, boosting growth. However, the drag of potentially higher tariffs could offset the impact of tax cuts. In a Democratic sweep, the TCJA would likely partially expire in 2025, with more taxes that could partially offset higher spending. A sweep by either party would likely result in net economic expansion.

 

Fiscal Policy Post-election
The four potential US election balances of power and the likely resulting policies

For illustrative purposes only.
As of September 30, 2024
Source: AB

A Democratic White House and Republican Congress would likely be net neutral for growth or produce a slight contraction. The TCJA could partially expire, with a higher effective corporate tax rate. Spending would probably grow slowly, with new tariffs unlikely. Under a Republican White House and Democratic Congress, the TCJA would likely partially expire, with more tax cuts unlikely, and spending should rise slowly. Tariffs are the wild card in this scenario: the heavier they are, the greater the drag on growth.

Investment Implications: Take the Cheap Option

What does all this means for investors? Our view is that it’s less about timing market entry or exit and more about managing portfolio allocations. In a sense, investors should overlay politics onto their fundamental views and look for cheap or free options.

Moderating but positive growth combined with falling inflation and rate cuts tends to produce support for risk assets. Given the historic levels of index concentration, we think return patterns could broaden out going forward. That creates the potential for active management to enhance returns.

We think the key is to focus on areas that are attractive from a macro perspective and would likely benefit from a change in leadership, with limited to no expected downside under the status quo. These include oil and gas, financial services, healthcare, and high-dividend or dividend-growth segments. For bonds, inflation protection seems sensible, as do select credit positions and capitalizing on a likely steepening yield curve.

In other words, target fundamentally attractive market segments likely to see a neutral, negligible or positive impact from potential post-election policies.

Energy: Playing the Field in the Transition

Let’s take a deeper dive into a couple of these areas, starting with the energy sector. Oil exploration was critical when the US struggled to expand production as a net energy importer. Thanks to shale oil’s emergence, the country has become the world’s largest oil producer and is nearly energy self-sufficient. Drilling today focuses more on economics than scrambling for resources. All told, we don’t think major oil producers’ plans will change much after the election.

On the renewable front, the Inflation Reduction Act (IRA) is a Democratic initiative but its job creation benefits traditionally Republican states. That creates bipartisan support to continue the legislation, though a change in White House leadership could bring changes to parts of the legislation.

The IRA catalyzed investment in alternative and clean energy, and Russia’s invasion of Ukraine added urgency to the drive to diversify away from fossil fuel reliance and toward energy sources that are climate-friendly, economically competitive, and domestically abundant.

The energy transition will continue to create winners and losers. Research and a discerning eye are prerequisites in a rising tide that’s lifting all boats. After all, some boats will be more seaworthy than others. Currently, areas like energy grid investment and electrical infrastructure seem to offer opportunities for effectively positioned firms.

Healthcare: Vast Scope and Complexity…but Opportunity

Healthcare is another sector that defies a straightforward assessment. At 17% of US GDP, it accounts for about $4.5 trillion in annual spending. Drug costs get a lot of airtime in legislative discussions, but hospital visits and physician fees drive a much larger amount of spending—from 50% to 80% of all healthcare costs.

Despite a substantial degree of tech-driven efficiency, healthcare costs have continued to rise—plagued by little price transparency and a lack of value-based payment systems. In some ways, the healthcare sector lacks a counterpart to the IRA as a catalyst for transformative investment. In this landscape, firms that demonstrate value and the ability to drive better outcomes should thrive.

In a policy-laden industry, some relatively insulated segments present exciting opportunities today. Robotics in surgery, for example, have enabled more precise and less invasive procedures. Advances in genetic therapy, gene editing and stem cell therapy are driving innovation. Then there’s the influence of tech in healthcare: given its potential to drive efficiency, we think it’s poised for growth.

AB’s Disruptor Series is designed to provide distinctive perspectives on critical issues facing the capital markets today.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

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