Election 2024: Investment Implications & Preparations
Expect the Unexpected…Then Expect it Again
This article provides three potential baskets to play rising odds of Trump as the Republican Nominee and/or Next President in the 2024 election as well as the results. The baskets can be inversed to play Democrat odds/win and we’ve included two versions - a net long and market neutral - to play election odds and then one to play post-election outcomes.
The purpose is to highlight risks, both upside and downside, in both equities and macro. It’s quite early on, but tomorrow is Super Tuesday and we will be hearing a lot more about this - and likely seeing a lot more implications on the way our portfolios move. If we’re doing groundhog day, it’s at least good to be prepared.
Same Disclaimer as Last Time: I’m apolitical by necessity. My firmly held belief, formed by experience, is that one cannot be an effective trader while at the same time being strongly ideological politically. Eventually, the bias and cognitive dissonance will get you, and you will double down on a trade that has no basis in reality but all the basis in the world in what you think reality should look like.
Therefore, please understand that I comment not on who I think should win the election or which candidate I think will be best, but only on the most likely course markets will take in response to the election’s odds/outcome. Overall, I enjoy trading much more than being opinionated about political parties but - every four years or so - there comes a time where I have to care about them in order to discern their impact on stocks. That’s all this is.
Also, as interesting as it would be for a dark horse candidate to pull ahead (and maybe one does), it’s looking right now like it will be Trump vs. Biden - that’s what I’ll be basing this framework off of. If things change I will update for that.
Back to our regularly scheduled program…
Investing through Election Day 2024
As we discussed in our “U.S. Fiscal Primacy” piece, it is our view that the two-party split on fiscal discipline has given way to a more broadly dirigiste view of government spending that is likely to continue regardless of who controls the government. I would highly recommend going back and reading the Fiscal Primacy thematic primer, as we will be implementing some core ideas from that thesis in our basket construction here. Mostly, the Fiscal Primacy basket is heavily over-indexed to the beneficiaries of the “Big Three”, the IRA, IIJA and CHIPS Act. While certain benefits are likely to persist, and there are some issues that fiscal spending is likely to continue on regardless (more likely in a divided government), it is fair to say that the Fiscal Basket is at least 50% a Biden Fiscal Basket.
Since we won’t be delving deeper into the measures already taken by the Biden administration that are likely to be expanded upon in a Biden win scenario, I’d highly recommend reading it to get an idea of the effect of Bidenomics in the markets thus far:
When it comes to the 2024 election it’s pretty much assured that it will be a repeat of Trump v. Biden/Harris (or just Harris, if Biden is incapacitated), and Trump’s odds to win have been very steadily rising:
Although this is a “repeat”, we have to be careful about simply assuming markets will repeat the past. Simply backtesting performance during respective administrations risks creating exposures to things we don’t really care about.
The fact is the chances of another COVID, with all the demand side stimulus and ZIRP it entails, happening again under Trump…pretty low. Another bout of geopolitically driven energy sector ascendancy off the lows followed by a historical mega-cap tech rebound happening again under Biden? Also low. History might rhyme, but it’s not a spotify playlist with one song on repeat.
I did a bit of looking around equity sell-side research on the election and I see some baskets that are “which stocks outperformed the most in 2016 when Trump won and which stocks outperformed the most in 2020 when Biden won”. That approach completely ignores the plethora of confounding variables in a basic Trump/Biden admin comparison versus a Trump/Biden rematch.
Listen, if anyone here loves simplicity - it’s me. You have all seen this in action, I love myself a good thought-pretzel but when it comes to making money I try to keep it as straightforward as possible without getting in over my head on risk.
UBS gets to buy Credit Suisse for essentially zero dollars in a Swiss government kiss on the cheek? I’m buying UBS. Semiconductors for artificial intelligence are woefully short? I’m buying the companies that make those chips. Weight loss drugs work now? Yeah, I’m buying the drug makers.
However, in this instance, nuance is not the enemy. There are many adages of how certain stocks perform under GOP vs. Democrat administrations that simply do not apply. As we will discuss later, the “higher US military industrial complex profits under GOP presidents” trade likely does not apply, nor have we seen significant and broad underperformance in the energy sector under Biden. Furthermore, both presidents are protectionists when it comes to China (albeit with Trump being more aggressive on trade policy). Yes, a second Trump Administration may increase tariffs, but the economic impact may be less than his first term since many measures are already in place. In years past, a republican sweep would be viewed as excellent for the private sector while fiscally contractionary and negative for big government contractors
I’ve been working on this basket for two months now and do you want to know why it didn’t take me a week? Because it’s f*cking infuriating (not to say that I don’t think I killed it in the final product - I do). Seriously, imagine yourself going back in time and showing this chart to the sell-side analysts predicting what the impact of a Trump to Biden presidential transition would be.
Truly aneurysm inducing stuff. Tell me, do you still want to base your basket off what happened on two individual election days when people were speculating without appreciation for how insane things would get with zero context? Yeah, that’s what I thought.
There are a lot of variables that occur over 4 years, let alone 8, that are a lot more important than who’s president. That’s why I think this theme has the most juice during the election year - I’m not necessarily trying to anticipate what happens in the 4 whole years of whoever win’s presidency, first and foremost I’m trying to anticipate how the market will react to them winning (or having higher odds of winning). Throughout this article, we will go back and forth between the implications of likely policy measures that we believe can impact the next 4 years and those that the market is acutely aware of and will therefore be impacted by election odds this year. The biggest difference between Trump and Biden presidencies (as it relates to markets) are likely the fiscal stimulus programs not in size but in focus, as well as their respective Tax Policies.
I have created two baskets:
A Tax Policy Basket: The most obvious implication of a Trump/Biden rematch and a GOP victory is the extension/permanance of Trump Tax Cuts (the TCJA) while a Democratic victory will result in significant impact for some companies from U.S. agreement to a Global and Domestic Minimum Corporate Tax Rate of 15%. This is much more objective and less speculative than the next basket, which is why it probably is better utilized as a reactive play on the outcome rather than a proactive play on the odds.
An Election 2024 Basket: To create our election 2024 basket, we create a series of sub-themes that are specific to individual aspects of each candidates likely impact on policy - on a sliding scale that does not over-index to Republican or Democrat “trifectas” in which all party wishes are granted and similarly takes heed of the areas in which both parties are, for the most part, similarly aligned. Additionally, we consider (from an as-apolitical-as-possible standpoint) the social implications of not just a Trump or Biden presidency but another Trump/Biden election.
Therefore, we’ve narrowed this theme down to sub-themes reflective of the nearly 8 years since Trump first took office and the end of the first term of the Biden presidency. Each of these sub-themes are likely to generate some impact relative to market perceptions of the presidential election outcome (more so than ever, for the next 8 months or so, this theme is going to be pure reflexivity - that is, perceptions affecting reality in markets - because it’s all hive-mind speculation). As I said earlier, we have already done much speculation (relatively successful speculation, considering the returns) on the major beneficiaries of Biden’s fiscal spending plans, therefore this article will focus on the beneficiaries of a Trump/Biden election with a potential GOP win by using themes for a Long/Short basket where longs benefit more from a GOP win and shorts are hurt either by GOP policies or a repeal of current Democratic ones. Therefore, this basket can ultimately serve also as a hedge for our current fiscal exposure.
By any metric, it’s quite likely to be a close race, but betting markets like polymarket already have Trump with a >50% chance of winning.
Tax Policy Basket
TCJA Extension vs. “Made in America”
If reelected, a top priority for President Trump would likely be making permanent the personal tax cuts from his 2017 Tax Cuts and Jobs Act (TCJA) which are currently set to expire in 2025.
Extending the tax cuts could add $3.5 trillion to the national debt over 8 years according to CBO estimates, which could require large concessions and would likely require some sort of adjustments to current fiscal spending plans.
In order to pass legislation extending the tax cuts, Trump would need Republican control of Congress and would likely use it to alter the budget - specifically as it relates to the IRA. Control of the House is a toss-up in 2024, while Republicans have a good chance of flipping the few seats needed to take control of the Senate.
A Republican-controlled Senate would be more sympathetic to Trump's policy goals like permanently extending the TCJA personal tax cuts, such as the expanded child tax credit, doubled standard deduction, and limits on the state and local tax (SALT) deduction.
In a surprise outcome that reelects Biden with control of the house, senate or both the Biden administration's changes to companies' tax burdens could look significantly different from the current landscape. Based on President Biden's Fiscal Year 2024 budget proposal and other policy discussions, several key changes could be anticipated that would affect a significant number of companies. As much as 10% of the S&P500 currently pays less than the statutory corporate tax rate and more than a handful pay zero tax at all.
We reevaluate the companies that are most likely to be affected by the renewal of the TCJA (or Trump’s making it permanent) and the new minimum taxes (both global and domestic) likely to be continued or passed under Biden to create a basket to play the result of the election, then create a basket to play market perceptions of the winner in the run up.
[Paywall Below: Beneath the paywall, there are two baskets as well as justification for each sub-theme in the election basket. Additionally, I provide some FX and Rate considerations for a potential Trump or Biden victory]