The Strategist

US elections: Is an early decision emerging or will the race remain close?

With the first presidential debate between US President Joe Biden and former President Donald Trump now behind us, it is an opportune time to look at the key campaign promises and the decisive factors for the US election outcome. The debate as such did not reveal new policy directions, but it did highlight the fragility of President Biden’s health, garnering significant media coverage. Many viewed this as a concern for the Biden campaign, but the media attention can also be seen as a positive aspect.

Date: 1 July 2024
Author: Tina Jessop, Senior Economist, LGT Private Banking, Sebastian Petric, LGT Senior FX Strategist
Reading time: 10 minutes

The Strategist US elections — © Shutterstock

Voters’ reaction (national polls) to the debate has been somewhat more muted than media coverage. After months of pretty much tied polling results, Trump widened his advantage on a national level and built out his lead in swing states. As the election draws nearer - and barring a substantial improvement in Biden’s condition or a replacement by another candidate - one should expect support for Trump to strengthen.

That being said, the outcome of Biden's re-election bid hinges largely on the events that unfolded during Thursday’s debate. The spotlight is shining brightly on Biden, dominating headlines and media coverage. Newspapers around the globe are featuring Biden prominently on their front pages. Interestingly, the focus is not on Trump, the debate's apparent winner, but on Biden, who is perceived to have faltered.

The manner in which this narrative is utilised will determine the course of events. Remarkably, the saying “there is no such thing as bad press” holds true. If Biden can rise above the current situation, he stands a chance of reclaiming lost support. For the time being, the Biden name is making headlines, capturing the public’s attention.

The next known upcoming milestones are the party conventions of Republicans on 15 to 18 July and Democrats on 19 to 22 August and the second and final presidential debate on 10 September. The vice-presidential debate on 25 September may also garner more than the usual attention, given the uncertainty around the election and the advanced age of the current candidates.

The Strategist US polls — © LGT, Bloomberg

Apart from Biden’s health, what is influencing the outcome of the election? It’s the economy!

Inflation and the health of the economy are undoubtedly key concerns amongst US voters. In fact, according to a Guardian/Harris poll carried out in May 2024, half of respondents believe the US is in recession and unemployment is at a multi-decade high. This is in stark contrast to the above-average 3% 2023 real GDP growth and a near-record low unemployment rate.

Hidden behind strong aggregate economic growth numbers, lower-income households however are clearly missing out. They do not own homes and do not own equities. Most of them have not benefited from the USD 20 trillion increase in the market capitalisation of US equities since 2019. Nor have they benefited from the 30% increase in the average selling price of homes sold in the US over the same period. What they are doing is spending a disproportionately large share of their income on items whose prices have risen sharply.

A year-on-year 3% inflation rate does not mean that prices are coming down. It simply means that the annual rate of increase is lower. US prices - and European ones alike for that matter - are 20% above their 2019 levels and 10% above the level from where they should be, if prices had risen at the 2000-2019 run rate. Everyday consumer goods, like gas at the petrol station and food, have increased even more. Lower income brackets of all backgrounds are suffering, and many are blaming President Biden.

One might assume that Biden’s social spending plans and tax cuts for lower incomes would attract these voters. In reality, they feel let down by the current administration. Undecided voters, even from minority backgrounds, may turn to the alternative option.

What to expect: key election topics

In addition the economy, key election issues include tax policy, immigration, abortion, social security, and foreign trade and geostrategic policy.

Under a Biden presidency, should he remain in the race, we would expect continuity on the economic and foreign policy fronts, with a tough but targeted stance on China, and a continued focus on climate (Inflation Reduction Act, IRA). Tax burdens on high-income earners and the very rich would rise, along with a possible increase in the corporate tax rate, while the 2017 Trump income tax cuts for lower-income households would be extended.

Trump is likely to be more erratic on foreign policy, clearly putting “America first”. He has threatened a tough stance against all trading partners - the idea of a 10% universal tariff on all imported goods has been floated - and against NATO members that fail to meet the 2% of GDP defence spending requirement. On the domestic front, Trump promised a full extension of the 2017 income tax cuts, deregulation and a partial repeal of the IRA. On geopolitics and immigration, he would certainly be US-centric and more resolute.

Implications for the US economy and public finances

Importantly, Americans will not only vote in a new president in November, they will also elect a new Congress. All of the seats in the House of Representatives and a third of the seats in the Senate are up for election. The composition of Congress will be crucial in determining the president’s ability to implement policy changes in certain areas.

In terms of economic implications, we expect a Trump presidency to have a modestly positive impact on GDP growth, driven by pro-business policies and stronger private demand in response to the tax cut extensions. We also expect Trump’s policies to be more inflationary, driven by tariffs, investments in nearshoring and defence spending, and potential labour shortages as immigration declines. Notably, immigration policy and tariffs can be instigated via executive order by the US president. Unlike tax cut extensions or a repeal of the IRA, they do not require congressional approval.

In terms of fiscal spending, the candidates’ priorities differ, but the end result will be a permanently elevated fiscal deficit and rising government debt. Both candidates are big spenders. The average annual fiscal deficit during Trump’s first presidency was close to -7% of GDP, while that under Biden is -7.5% of GDP. Both are well above any post-war equivalents. Even a divided government is unlikely to change this trajectory much.

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We apply a “hybrid approach” (internal fundamental analysis combined with “theScreener”, an external, purely quantitative analysis tool). TheScreener is based on purely quantitative, i.e. computable variables such as (but not exclusively restricted to) profit adjustments of the past few weeks, stock valuation in relation to historical performance and comparison groups, the technical trend, performance in relation to the market etc. The assessment of the equity analysts, which is largely based on a qualitative analysis, does not need to match with the one of theScreener. For the overall judgement the assessment of the equity analysts overrides the one of theScreener. LGT Bank (Switzerland) Ltd. categorizes its analysis recommendations into five ratings: for a “Buy” recommendation we expect a relative outperformance compared with the sector. Only equities subjected to an internal fundamental analysis can be rated “Buy”. The recommendation “Attractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly positive” or “positive”. A moderate relative outperformance versus the index is expected. For equities that we rate as “Hold” we expect a performance largely in line with the one of the sector. This can comprise both equities for which a fundamental analysis has been carried out as well as equities that theScreener ranks as “neutral” versus the index. The recommendation “Unattractive” is used for equities exclusively ranked by theScreener without any internal fundamental analysis as “slightly negative”. A moderate relative underperformance versus the index is expected. By contrast, “Sell” recommendations are based on the expectation of a relative underperformance compared with the sector. This can comprise both equities for which we are recommending “Sell” for fundamental reasons as well as equities that theScreener ranks as “negative” versus the index. Therefore the ratings always reflect a relative consideration versus the sector and/or specified index. The risk assessment is based on the individual judgement of the analyst (e.g. we assume a “high” risk for illiquid shares, highly indebted companies or shares from developing countries).

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Definition of rating categories of S&P and Moody’s which are relevant for us:

AAA/Aaa: Borrower with highest credit quality. Default risk also virtually negligible over the longer term
AA/Aa: Safe investment, default risk virtually negligible but more difficult to assess in the longer term
A: Safe investment as long as no unforeseen events impair the overall economy or sector
BBB/Baa: Average investment. However, problems must be expected if the overall economy deteriorates
BB/Ba: Speculative investment. Defaults must be expected if the economic situation deteriorates
B: Highly speculative investment. Defaults are likely if the economic situation deteriorates

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