"This year's global elections are significantly influencing fixed-income markets, given the potential for policy changes ahead. Regardless of election results, Western Asset's disciplined and well-established investment process minimizes the distraction of short-term market noise and highlights areas with the greatest potential. This consistent approach is especially important during US election years, when market volatility and political uncertainty tend to increase."
Michael Buchanan, CFA
Chief Investment Officer
A Pivotal Year in Global Politics
Pivotal elections around the globe can have far-reaching implications for investors. Major elections include those in Mexico, France, the UK, India, Panama and beyond. In the US, the presidential race is poised to be one of the most closely watched in recent history, particularly given the dramatic events of the past several months. These include the live telecast of an assassination attempt on the Republican nominee, Donald Trump, as well as a surprisingly abrupt shift at the top of the Democratic ticket from Joe Biden to Kamala Harris. The gravity of these seismic developments have undoubtedly heightened public anticipation and scrutiny surrounding the race for the White House.
The results are expected to significantly shape both domestic and international policies, with direct implications for fixed-income investors. However, it's important to remember that the majority of voters may already feel like they know what they can expect from Trump, given his first term, and from Harris, given her role as Vice President since 2021.
It's widely understood that election years can have a significant impact on fixed-income markets due to the uncertainty and potential policy changes arising from an administration change. Although this year's US election campaigns are not primarily focused on economic policies–rather, social issues and personalities truly distinguish the two candidates–we'll be watching closely for the direct and indirect economic implications, such as those related to fiscal policy, inflation, regulatory changes, immigration reform and more.
WHAT'S INSIDE THE REPORT
Here we explore the potential market implications of the 2024 election cycle through four distinct sections:
- Broader macroeconomic and market implications,
- Sector-specific expectations through the lens of the two likely administrations in the US,
- A high-level framework for understanding key global elections and their impact on fixed-income markets, and
- Why active investment in fixed-income remains prudent over passively holding cash during an election year.
"A Trump victory, particularly with a Republican sweep, would likely be seen as inflationary due to policies such as tax cuts, increased tariffs and deregulation. Policies like these can potentially raise long-term interest rates and boost corporate earnings and balance sheet strength. Similarly, a Democratic sweep may also be perceived as inflationary, as increased spending on health care, social programs, infrastructure and regulation likely would not be fully offset by expiring tax cuts in 2025, potentially leading to higher long-term rates."
The US Election and the Macroeconomic Environment
Inflation Rates, Expectations and Investor Impact
Inflation surged to multi-decade highs in the post-Covid era, affecting virtually all Americans. At its peak in June 2022, yearover- year (YoY) inflation, as measured by the core Personal Consumption Expenditures (PCE) Price Index, reached 6.8%. Since then, we've seen significant improvement as core PCE inflation has slowed to 2.6% YoY as of June 2024. While the situation has improved, inflation remains on investors' minds as it erodes purchasing power, including the power of fixed-income returns. Even if fixed-income produces attractive returns, they are devalued by inflation. This reduction in real inflation-adjusted returns poses a significant risk for fixed-income investors, making inflation a critical factor to consider when making investment decisions.
Inflation Expectations
How an election will affect actual inflation rates is highly uncertain. However, the election outcome can have an immediate impact on inflation expectations as the anticipated changes in economic policies proposed by the incoming administration are typically known. For instance, if the new administration's policies are perceived as potentially inflationary, such as increasing government spending without corresponding revenue increases, this could raise inflation expectations among market participants. Then, consumer behavior may change if the general expectation is that even higher prices are coming soon.
Policy Differences
Here we outline various potential broad election outcomes and examine how they could shape the trajectory of prevailing policy initiatives and influence the macroeconomic environment. While overarching objectives may appear straightforward, it's important to recognize that even a single-party sweep might struggle to garner unanimous support of its policies within its own ranks. Over time, we believe this dynamic will likely temper the election's impact on fiscal policies and, by extension, monetary policy.
Inflation and Treasury Yields
A Republican sweep would likely lead to a push for lower taxes, more protectionist trade and immigration policies, and a lighter touch on government regulations that are perceived by the Trump administration to be overly burdensome. While these policies could boost economic growth and business investment, they may also lead to higher inflation and a larger deficit gap. This could put pressure on Treasury yields, especially on the long end of the yield curve, as investors demand a higher premium to compensate for inflation risk.
A Democratic sweep would likely result in a push for higher taxes on the wealthy and corporations, and increased government spending on social programs and infrastructure. While these initiatives could stimulate economic growth and increase revenue in the long term, they are likely to result in higher deficit spending in the short term. This could cause some inflation concern and upward pressure on Treasury yields, but perhaps result in a more muted impact than a Republican sweep.
A split Congress would likely result in a more moderate and gridlocked policy environment. Compromise would be essential to pass any significant economic legislation, likely resulting in more moderate tax policies and spending measures. While large-scale reforms might be challenging, incremental changes could be achievable. The necessity for compromise could lead to more balanced fiscal policies, potentially resulting in a more limited impact on the deficit. This outcome would have the most benign impact on inflation expectations and Treasury yields.
POLICY DIFFERENCES: Inflation
| Election Outcome | Key Takeaways | Directional Impact: Inflation Expectations |
|---|---|---|
| Blue Wave | Higher taxes on the wealthy and corporations, and increased government spending on social programs and infrastructure | Modestly higher |
| Split: Dem WH/ Rep Congress |
A more moderate and gridlocked policy environment as compromise would be essential to pass any significant economic legislation | Neutral |
| Split: Rep WH/ Dem Congress |
||
| Red Wave | Lower taxes, more protectionist trade and immigration policies, and a lighter touch on regulation | Higher |
| Election Outcome | Blue Wave |
|---|---|
| Key Takeaways | Higher taxes on the wealthy and corporations, and increased government spending on social programs and infrastructure |
| Directional Impact: Inflation Expectations | Modestly higher |
| Election Outcome | Split: Dem WH/Rep Congress |
|---|---|
| Key Takeaways | A more moderate and gridlocked policy environment as compromise would be essential to pass any significant economic legislation |
| Directional Impact: Inflation Expectations | Neutral |
| Election Outcome | Split: Rep WH/Dem Congress |
|---|---|
| Key Takeaways | A more moderate and gridlocked policy environment as compromise would be essential to pass any significant economic legislation |
| Directional Impact: Inflation Expectations | Neutral |
| Election Outcome | Red Wave |
|---|---|
| Key Takeaways | Lower taxes, more protectionist trade and immigration policies, and a lighter touch on regulation |
| Directional Impact: Inflation Expectations | Higher |
BOTTOM LINE
Western Asset's view is that the disinflation process we've seen since the post-Covid reopening should continue under either administration, but excessive spending or tax cuts could increase inflation expectations.
The Federal Reserve and Monetary Policy
The Federal Reserve (Fed) historically has shown a willingness to respond aggressively to significant financial shocks, regardless of election years. This was evident in its actions during the 2008 global financial crisis (GFC) and the 2020 Covid pandemic, when the Fed implemented substantial policy measures to stabilize the US economy. As of summer 2024, the market is pricing in at least one 25-basis-point (bp) rate cut in September ahead of the November election.
Post-Election Fiscal Policy Adjustments
The Fed is unlikely to preemptively adjust its monetary policy based on anticipated changes in fiscal policy before the US presidential election. However, the Fed is more likely to respond to fiscal policy changes after the election, as evidenced by the reaction following the 2016 election, when it adjusted interest rates in the face of expected fiscal stimulus from the newly elected administration. If there is a Republican or Democratic sweep, the impact of fiscal policies could be more pronounced, and cause inflation expectations to rise. If the Fed is concerned about keeping inflation expectations anchored, this could limit the degree of monetary policy easing and result in a higher terminal rate. The terminal rate refers to the final interest rate level that the Fed aims to achieve at the end of a rate-hiking or rate-cutting cycle.
Fed Independence
If Democrats win the White House, we don't expect any change to the current environment of Fed independence. However, Trump and some of his advisors have expressed interest in the president having more input into monetary policy decisions. If this was pursued by a new Republican administration, it would most likely be challenged in the courts. While we believe the Fed's independence would ultimately be upheld, this scenario could cause significant concern and confusion in financial markets and could lead to heightened interest-rate volatility.
BOTTOM LINE
The Fed is likely to maintain its data-dependent approach with respect to monetary policy. This should reinforce its neutrality and help it avoid any perception of political bias that it would face if it were to make preemptive interest rate adjustments based on anticipated changes in fiscal policy before the US presidential election. We believe that Fed independence will hold, but uncertainty around this issue could rise.
Trade Policies
Trade policies carry substantial macroeconomic impact, and there is growing concern among global investors about the possibility of heightened trade tensions–especially if Trump wins the 2024 election and enforces aggressive trade measures. Such a scenario could destabilize financial markets, stifle economic growth, stoke further inflation and raise the specter of a global recession.
While both candidates support protectionist trade policies, their approaches to negotiation and implementation differ significantly. Trump's proposed tariffs on China and other major trading partners may be a starting point for negotiations, but a Trump 2.0 scenario would likely bring greater trade friction compared to the continuation of current Biden administration policies. In our view, tariffs under Trump would likely:
- Strengthen the US dollar versus key trading partners, while weakening emerging market (EM) currencies,
- Drive up consumer prices, and
- Squeeze margins and profits for exporters and producers.
One mitigating factor to consider is that Trump's trade policies are now well–established, lacking the element of surprise that once accompanied his spontaneous social media announcements. Additionally, after experiencing his presidency, governments and corporations worldwide have developed contingency plans, including nearshoring strategies, to manage global trade and supply chain disruptions.
Exhibit 2 illustrates the returns of select asset classes following Trump's win in November 2016. While medium-term dynamics may temper some of these fluctuations, we anticipate a similar initial market reaction in both direction and scale. With less than two months to the election, we suspect some of the "Trump premium" is already reflected in asset prices.
POLICY DIFFERENCES: Trade Policies
With regard to trade policy, Western Asset expects the incoming President to use existing laws/frameworks to implement changes. Specifically, Section 232 of the Trade Expansion Act gives the executive branch authority to issue tariffs if foreign imports are deemed a threat to national security. As the president does not need Congress to progress with tariffs under this provision, the party split or sweep in Congress will likely not have a major impact on trade policy.
| Election Outcome | Key Takeaways | Directional Impact |
|---|---|---|
| Blue Wave | Harris advocates for a more targeted strategy toward China, focusing on key sectors like technology, electric vehicles and defense to safeguard domestic production. This "small yard, high fence" approach aims to restrict trade in sensitive industries while allowing for strong trade relations in less critical areas. | With more restrictive trade polices averted, macro conditions and country dynamics will be the key arbiters of EM asset prices. As such, a soft landing in the US and an easing Fed would likely benefit EM spreads and rates, translating to a weaker US dollar (and stronger EM currencies). |
| Split: Dem WH/ Rep Congress |
As previously mentioned, the president has authority to issue tariffs if foreign imports are deemed a threat to national security, thus there is no need for Congressional approval. | Tariffs would be implemented via the executive branch and not Congress. |
| Split: Rep WH/ Dem Congress |
||
| Red Wave | Trump advocates for a broader and more aggressive protectionist stance toward China, proposing a 60% tariff increase on all Chinese imports and revoking China's most-favored-nation status. This strategy would dramatically affect overall trade between the two nations. He has also suggested imposing a 10% tariff on nearly all imported goods, which could trigger retaliatory actions and lead to increased inflation. | There will be winners and losers as trade relationships are reformulated. We expect a "negotiated" roll out of more restrictive trade polices. Acknowledging that there will be crosscurrents, we believe Mexico (and Mexican assets) will be net beneficiaries of Trump trade policies. |
| Election Outcome | Blue Wave |
|---|---|
| Key Takeaways | Harris advocates for a more targeted strategy toward China, focusing on key sectors like technology, electric vehicles and defense to safeguard domestic production. This "small yard, high fence" approach aims to restrict trade in sensitive industries while allowing for strong trade relations in less critical areas. |
| Directional Impact | With more restrictive trade polices averted, macro conditions and country dynamics will be the key arbiters of EM asset prices. As such, a soft landing in the US and an easing Fed would likely benefit EM spreads and rates, translating to a weaker US dollar (and stronger EM currencies). |
| Election Outcome | Split: Dem WH/Rep Congress |
|---|---|
| Key Takeaways | As previously mentioned, the president has authority to issue tariffs if foreign imports are deemed a threat to national security, thus there is no need for Congressional approval. |
| Directional Impact: Inflation Expectations | Tariffs would be implemented via the executive branch and not Congress. |
| Election Outcome | Split: Rep WH/Dem Congress |
|---|---|
| Key Takeaways | As previously mentioned, the president has authority to issue tariffs if foreign imports are deemed a threat to national security, thus there is no need for Congressional approval. |
| Directional Impact | Tariffs would be implemented via the executive branch and not Congress. |
| Election Outcome | Red Wave |
|---|---|
| Key Takeaways | Trump advocates for a broader and more aggressive protectionist stance toward China, proposing a 60% tariff increase on all Chinese imports and revoking China's most-favored-nation status. This strategy would dramatically affect overall trade between the two nations. He has also suggested imposing a 10% tariff on nearly all imported goods, which could trigger retaliatory actions and lead to increased inflation. |
| Directional Impact | There will be winners and losers as trade relationships are reformulated. We expect a "negotiated" roll out of more restrictive trade polices. Acknowledging that there will be crosscurrents, we believe Mexico (and Mexican assets) will be net beneficiaries of Trump trade policies. |
BOTTOM LINE
Trade policies, particularly the threat of aggressive measures against China if Trump wins, have the potential to disrupt financial markets, hinder economic growth and raise concerns about a global recession and inflationary consequences.
Regulatory Environment
The regulatory environment can influence both near- and long-term economic trends and reshape the playing field for various industries. We have seen regulatory focus centered on the financial sector, energy sector and (more recently) the technology sector, as well as on broader-based protections for workers, consumers and the environment. The implementation of these regulations often comes with nearterm economic costs, in exchange for the hope of longer-term economic gains.
From a macro perspective, the regulatory environment can influence growth trends and the potential path of interest rates. A changing regulatory environment can also impact sector- and issuer-specific credit trends, including the size and scope of the capital structure from various entities that seek regulatory compliance. These myriad factors can have a direct impact on credit spreads and borrowing costs for issuers, as well as lending opportunities for active managers.
POLICY DIFFERENCES: Regulatory Environment
| Election Outcome | Key Takeaways | Directional Impact: Number of Regulations |
|---|---|---|
| Blue Wave | Expect tighter regulations, especially in the areas of environmental protection, labor rights and consumer protections. Emphasis on climate initiatives, renewable energy projects, antitrust enforcement and increased oversight of the technology sector will continue. Enhanced regulation has the potential to challenge near-term profitability and operating margins. | Increased regulation (++) |
| Split: Dem WH/ Rep Congress |
Expect current regulatory efforts to stand, and additional regulations could be added. | Increased regulation (+) |
| Split: Rep WH/ Dem Congress |
Expect some unwinding of the existing regulatory regime. | Decreased regulation (–) |
| Red Wave | Expect less stringent regulatory policies to stimulate economic growth. Anticipate efforts to reduce regulatory burdens across multiple sectors, including energy, finance and health care. Environmental regulations may be rolled back. There may be a potential positive impact on near-term operating margins in a lower-cost environment. | Decreased regulation (––) |
| Election Outcome | Blue Wave |
|---|---|
| Key Takeaways | Expect tighter regulations, especially in the areas of environmental protection, labor rights and consumer protections. Emphasis on climate initiatives, renewable energy projects, antitrust enforcement and increased oversight of the technology sector will continue. Enhanced regulation has the potential to challenge near-term profitability and operating margins. |
| Directional Impact: Number of Regulations | Increased regulation (++) |
| Election Outcome | Split: Dem WH/Rep Congress |
|---|---|
| Key Takeaways | Expect current regulatory efforts to stand, and additional regulations could be added. |
| Directional Impact: Number of Regulations | Increased regulation (+) |
| Election Outcome | Split: Rep WH/Dem Congress |
|---|---|
| Key Takeaways | Expect some unwinding of the existing regulatory regime. |
| Directional Impact: Number of Regulations | Decreased regulation (–) |
| Election Outcome | Red Wave |
|---|---|
| Key Takeaways | Expect less stringent regulatory policies to stimulate economic growth. Anticipate efforts to reduce regulatory burdens across multiple sectors, including energy, finance and health care. Environmental regulations may be rolled back. There may be a potential positive impact on near-term operating margins in a lower-cost environment. |
| Directional Impact: Number of Regulations | Decreased regulation (––) |
BOTTOM LINE
The 2024 election regulatory outcomes will largely depend on the ideological leanings and policy priorities of the winning party. Ultimately, we can evaluate whether a regulation's long-term economic benefits exceed short-term costs, and this timing may be at odds with political decision-making time horizons. Entities in heavily regulated industries may face higher near-term compliance costs or increased scrutiny under a Democratic administration, while sectors that have been subject to deregulation efforts under Republican leadership could experience a less stringent regulatory climate.
Tax Policy
Tax policy is almost always a focus during presidential election cycles, though this election could be particularly consequential. The issue of rising federal deficits draws increasing demand for policy solutions, which are wide-ranging, uncertain and often deprioritized in favor of other initiatives when a single party is in power.
What is known is that many provisions of the federal tax changes that took effect following the enactment of the 2017 Tax Cuts and Jobs Act (TCJA) under the Trump administration are slated to expire in 2025. The TCJA eased individual income tax burdens by reducing the highest individual income tax rate to 37% (from 39.6%), introducing wider brackets, raising the standard deduction and limiting the impact of the Alternative Minimum Tax (AMT). The TCJA also reduced the corporate income tax rate to 21% from 35%. These measures were partially funded by limiting state and local tax deductions to $10,000, which increased the tax burden for high-net-worth individuals in states facing high tax rates and larger potential deductions.
Without further Congressional action, most individuals would face higher tax burdens following a return of the 39.6% top tax rate, narrower tax brackets and planned expansion of the AMT when the TCJA sunsets in late 2025. Moreover, a planned reduction of the standard deduction and lower child tax credits will compound individual tax liabilities but may be offset by a return of state and local tax deductions in high-tax states. Notably, the TCJA corporate tax reduction to 21% will not expire but could be targeted as an area for compromise. Because tax policy changes may be more consequential in this election, and because of the significant impact that tax policy can have on individuals, we expect the topic to be a greater focus for voters.
POLICY DIFFERENCES: Tax Policy
| Election Outcome | Key Takeaways | Directional Impact: Path of Tax Rates |
|---|---|---|
| Blue Wave | The TCJA provisions would likely expire as scheduled, resulting in higher tax rates. Western Asset expects that Democrats, given full control, would seek higher tax rates from top earners and corporations but also pursue additional spending initiatives. Following inflation surges over the last few years and the scope of current deficits, such spending initiatives could be less popular than those of recent Democratic administrations. We would expect higher tax rates to potentially diminish growth trends, and that a more restrictive fiscal policy could provide cover for the Fed to soften its monetary stance and potentially lower rates. | Higher tax rates upon expiration of the TCJA, plus potentially new tax rates for individuals and corporations (++) |
| Split: Dem WH/ Rep Congress |
We would expect the TCJA to expire, resulting in higher tax rates as we would not expect material legislation for tax cut extensions to pass through Congress. At the same time, we anticipate that efforts to increase tax rates even further would be challenged. | Expiration of TCJA tax cuts may result in higher tax rates (+) |
| Split: Rep WH/ Dem Congress |
||
| Red Wave | A Republican administration would likely seek to extend the individual tax provisions slated to expire. Trump has indicated intentions to further lower corporate income taxes. The extensions of these cuts would be costly, with a Congressional Budget Office estimate of $4.6 trillion in costs over 10 years to maintain current provisions without commensurate spending reductions or additional revenues. A further reduction in the corporate tax rate would add to these costs. In this scenario, we would anticipate lower tax rates contributing to near-term growth trends, potentially stoking inflationary pressures and leading to longer-term growth and debt concerns. | Trump could extend the TCJA and potentially seek additional tax relief measures (–) |
| Election Outcome | Blue Wave |
|---|---|
| Key Takeaways | The TCJA provisions would likely expire as scheduled, resulting in higher tax rates. Western Asset expects that Democrats, given full control, would seek higher tax rates from top earners and corporations but also pursue additional spending initiatives. Following inflation surges over the last few years and the scope of current deficits, such spending initiatives could be less popular than those of recent Democratic administrations. We would expect higher tax rates to potentially diminish growth trends, and that a more restrictive fiscal policy could provide cover for the Fed to soften its monetary stance and potentially lower rates. |
| Directional Impact: Path of Tax Rates | Higher tax rates upon expiration of the TCJA, plus potentially new tax rates for individuals and corporations (++) |
| Election Outcome | Split: Dem WH/Rep Congress |
|---|---|
| Key Takeaways | We would expect the TCJA to expire, resulting in higher tax rates as we would not expect material legislation for tax cut extensions to pass through Congress. At the same time, we anticipate that efforts to increase tax rates even further would be challenged. |
| Directional Impact: Path of Tax Rates | Expiration of TCJA tax cuts may result in higher tax rates (+) |
| Election Outcome | Split: Rep WH/Dem Congress |
|---|---|
| Key Takeaways | We would expect the TCJA to expire, resulting in higher tax rates as we would not expect material legislation for tax cut extensions to pass through Congress. At the same time, we anticipate that efforts to increase tax rates even further would be challenged. |
| Directional Impact: Path of Tax Rates | Expiration of TCJA tax cuts may result in higher tax rates (+) |
| Election Outcome | Red Wave |
|---|---|
| Key Takeaways | A Republican administration would likely seek to extend the individual tax provisions slated to expire. Trump has indicated intentions to further lower corporate income taxes. The extensions of these cuts would be costly, with a Congressional Budget Office estimate of $4.6 trillion in costs over 10 years to maintain current provisions without commensurate spending reductions or additional revenues. A further reduction in the corporate tax rate would add to these costs. In this scenario, we would anticipate lower tax rates contributing to near-term growth trends, potentially stoking inflationary pressures and leading to longer-term growth and debt concerns. |
| Directional Impact: Inflation Expectations | Trump could extend the TCJA and potentially seek additional tax relief measures (–) |
BOTTOM LINE
Rising deficits and debt levels have informed our view that long-term growth may be anchored by unsustainable debt levels. Despite the rhetoric, we do not expect policies associated with a blue or red sweep to prioritize deficit reduction. A split government would force compromise, with likely outcomes of higher taxes and lower spending measures to help address some of the attendant long-term challenges.
"While tax policy rhetoric can contribute to market volatility, the potential for elevated deficits going forward bodes well for tax-exempt municipals, which can blunt the impact of potentially higher tax rates in the future."
Credit Sector Analysis
Elections can have far-reaching consequences for the business world as the policies implemented by newly elected officials can dramatically reshape the landscape for various industries. Macro policy adjustments and their impacts on both the overall economy and market sentiment may weigh significantly on the direction of credit spreads. Favorable economic policies that bolster economic growth and increase investor confidence may cause spreads to tighten. Conversely, spreads may widen if the perceived risk of corporate debt increases because new policies are business-unfriendly or breed uncertainty. These broad market movements may overshadow disparities at the individual industry level as overall risk sentiment fluctuates.
A look back at the initial years of the Trump administration from 2017 to 2018 helps illustrate this point (disregarding the Biden administration years due to massive Covid dislocations). Credit spreads marched tighter in 2017 when initial policy from the White House focused on deregulation and tax reform. Spreads leaked wider in 2018 when economic uncertainty increased, corresponding with the administration's focus on trade and tariffs.
2017 Focus – Deregulation & Tax Reform
- February 3, 2017: Trump signs an executive order to review the Dodd-Frank Wall Street Reform and Consumer Protection Act, aiming to roll back financial regulations.
- March 28, 2017: Trump signs an executive order to roll back Obama–era climate policies, including the Clean Power Plan.
- June 1, 2017: Trump announces the US withdrawal from the Paris Climate Agreement.
- December 22, 2017: Trump signs the Tax Cuts and Jobs Act into law, which significantly reduces corporate tax rates and alters individual tax brackets.
2018 Focus – Trade & Tariffs
- March 1, 2018: Trump announces global tariffs on steel and aluminum imports, sparking concerns of a trade war.
- China-Specific Tariffs: Trump imposes tariffs on $250 billion worth of Chinese goods in three rounds, escalating the trade war with China.
- July 2018 – Imposes 25% tariffs on $34 billion of imports
- August 2018 – Imposes 25% tariffs on additional $16 billion
- September 2018 – Imposes 10% tariffs on $200 billion (later raised to 25% tariffs in 2019)
- September 30, 2018: Renegotiation of NAFTA led to the United States-Mexico-Canada Agreement (USMCA), not ratified until 2020, but negotiations concluded in 2018.
"While the investment-grade corporate sector continues to benefit from very sound fundamentals, the results of the coming election in the US could have an outsized impact on select sectors. Here we have highlighted the three sectors that we believe present the largest sources of potential volatility, and investors would be well served to prepare accordingly."
Certain industries can be more affected by election results than others. Based on anticipated policy changes, three industries–banking, energy and health care & pharmaceuticals–are typically more impacted. Our research teams are closely evaluating potential key takeaways based on the election outcome, and we have summarized our insights on both impacted and potentially non-impacted industries.
POLICY DIFFERENCES: Banking
| Election Outcome | Key Takeaways |
|---|---|
| Blue Wave | Policy impulses at this level do not require Congressional approval, therefore the outcomes for these two results are likely to be the same. In this instance, we largely see a continuation of current trends within the banking industry, which is already highly regulated. Smaller regional banks would likely feel continued pressure as they come under further scrutiny and need to raise additional capital, which would in turn pressure spreads. |
| Split: Dem WH/ Rep Congress |
|
| Split: Rep WH/ Dem Congress |
The largest US banks already operate in a highly stringent environment; therefore, we do not see a material impact in this scenario. However, Republican control of the White House should be a marginal positive for the smaller regional banks as it likely would dampen the burden of the industry's ongoing transition to a more regulated environment. |
| Red Wave | This scenario would be the most beneficial for the banking sector, as Republicans are likely to be the friendliest in terms of easing stringent regulations. We would anticipate a more friendly environment, particularly for regional banks, and would expect spreads to compress as a result. Despite this, investors should be mindful that the smaller banks will likely need to raise capital regardless, and thus additional bond supply is anticipated in any outcome. |
| Election Outcome | Blue Wave |
|---|---|
| Key Takeaways | Policy impulses at this level do not require Congressional approval, therefore the outcomes for these two results are likely to be the same. In this instance, we largely see a continuation of current trends within the banking industry, which is already highly regulated. Smaller regional banks would likely feel continued pressure as they come under further scrutiny and need to raise additional capital, which would in turn pressure spreads. |
| Election Outcome | Split: Dem WH/Rep Congress |
|---|---|
| Key Takeaways | Policy impulses at this level do not require Congressional approval, therefore the outcomes for these two results are likely to be the same. In this instance, we largely see a continuation of current trends within the banking industry, which is already highly regulated. Smaller regional banks would likely feel continued pressure as they come under further scrutiny and need to raise additional capital, which would in turn pressure spreads. |
| Election Outcome | Split: Rep WH/Dem Congress |
|---|---|
| Key Takeaways | The largest US banks already operate in a highly stringent environment; therefore, we do not see a material impact in this scenario. However, Republican control of the White House should be a marginal positive for the smaller regional banks as it likely would dampen the burden of the industry's ongoing transition to a more regulated environment. |
| Election Outcome | Red Wave |
|---|---|
| Key Takeaways | This scenario would be the most beneficial for the banking sector, as Republicans are likely to be the friendliest in terms of easing stringent regulations. We would anticipate a more friendly environment, particularly for regional banks, and would expect spreads to compress as a result. Despite this, investors should be mindful that the smaller banks will likely need to raise capital regardless, and thus additional bond supply is anticipated in any outcome. |
POLICY DIFFERENCES: Energy
| Election Outcome | Key Takeaways |
|---|---|
| Blue Wave | In either scenario, we expect the impact to the energy sector to largely be a continuation of what we've seen over the past four years. However, despite material and infrastructure constraints, a blue sweep is likely to accelerate clean energy and electric vehicle (EV) adoption, as this has been one of the major platforms of the current administration. Investors should keep an eye on this outcome as it is likely to drive certain commodity prices higher. |
| Split: Dem WH/ Rep Congress |
|
| Split: Rep WH/ Dem Congress |
The oil & gas industry continues to behave conservatively, and geopolitical events will have an outsized impact. Management has long since shifted away from the industry's boom/bust past and would likely need to see consistent policy changes before taking action. That said, a Republican administration may incentivize more domestic production, benefiting midstream enterprises through permitting reform and reversing the liquified natural gas (LNG) export ban. |
| Red Wave |
| Election Outcome | Blue Wave |
|---|---|
| Key Takeaways | In either scenario, we expect the impact to the energy sector to largely be a continuation of what we've seen over the past four years. However, despite material and infrastructure constraints, a blue sweep is likely to accelerate clean energy and electric vehicle (EV) adoption, as this has been one of the major platforms of the current administration. Investors should keep an eye on this outcome as it is likely to drive certain commodity prices higher. |
| Election Outcome | Split: Dem WH/Rep Congress |
|---|---|
| Key Takeaways | In either scenario, we expect the impact to the energy sector to largely be a continuation of what we've seen over the past four years. However, despite material and infrastructure constraints, a blue sweep is likely to accelerate clean energy and electric vehicle (EV) adoption, as this has been one of the major platforms of the current administration. Investors should keep an eye on this outcome as it is likely to drive certain commodity prices higher. |
| Election Outcome | Split: Rep WH/Dem Congress |
|---|---|
| Key Takeaways | The oil & gas industry continues to behave conservatively, and geopolitical events will have an outsized impact. Management has long since shifted away from the industry's boom/bust past and would likely need to see consistent policy changes before taking action. That said, a Republican administration may incentivize more domestic production, benefiting midstream enterprises through permitting reform and reversing the liquified natural gas (LNG) export ban. |
| Election Outcome | Red Wave |
|---|---|
| Key Takeaways | The oil & gas industry continues to behave conservatively, and geopolitical events will have an outsized impact. Management has long since shifted away from the industry's boom/bust past and would likely need to see consistent policy changes before taking action. That said, a Republican administration may incentivize more domestic production, benefiting midstream enterprises through permitting reform and reversing the liquified natural gas (LNG) export ban. |
POLICY DIFFERENCES: Heath Care & Pharmaceuticals
| Election Outcome | Key Takeaways |
|---|---|
| Blue Wave | A blue sweep could lead to an expansion of the ACA, benefiting companies focused on health care access and affordability. However, pharmaceutical companies could face profitability headwinds from price controls. |
| Split: Dem WH/ Rep Congress |
In either of these scenarios, we expect for the status quo to continue in this sector. Having a split government prohibits either side from accomplishing some of the larger things on their agendas, which would extend the current state of affairs within the sector. |
| Split: Rep WH/ Dem Congress |
|
| Red Wave | A red sweep and the anticipated deregulatory impulse would likely benefit pharmaceutical companies. Health care providers could face potential headwinds from reduced government funding. |
| Election Outcome | Blue Wave |
|---|---|
| Key Takeaways | A blue sweep could lead to an expansion of the ACA, benefiting companies focused on health care access and affordability. However, pharmaceutical companies could face profitability headwinds from price controls. |
| Election Outcome | Split: Dem WH/Rep Congress |
|---|---|
| Key Takeaways | In either of these scenarios, we expect for the status quo to continue in this sector. Having a split government prohibits either side from accomplishing some of the larger things on their agendas, which would extend the current state of affairs within the sector. |
| Election Outcome | Split: Rep WH/Dem Congress |
|---|---|
| Key Takeaways | In either of these scenarios, we expect for the status quo to continue in this sector. Having a split government prohibits either side from accomplishing some of the larger things on their agendas, which would extend the current state of affairs within the sector. |
| Election Outcome | Red Wave |
|---|---|
| Key Takeaways | A red sweep and the anticipated deregulatory impulse would likely benefit pharmaceutical companies. Health care providers could face potential headwinds from reduced government funding. |
| Industry | Key Takeaways |
|---|---|
| Auto & Related | Primary areas of focus include: Internal combustion engine (ICE) longevity versus the push for increased EV adoption rates, along with tariffs and their impact across the automotive industry value chain. The Harris administration retains focus on green energy and EVs, while Trump is expected to push for a rollback of the Inflation Reduction Act (IRA) credits, an unwind of EPA mandates and higher tariffs. |
| Banks | Overall impact is expected to be minimal in a Harris administration, as the primary focus would remain on strict regulation, specifically on M&A transactions. Under a Trump administration, we expect a more favorable tax environment, less restrictive regulatory backdrop, and higher degrees of mergers and/or industry consolidation. |
| Energy | Trump's policies would certainly be supportive of the industry in general, but we doubt there are substantive regulatory changes that would alter the current trajectory of capital discipline, low leverage and production restraint. With respect to federal agency actions that either help or harm the industry, we note that the recent ruling by the Supreme Court in the Chevron deference lawsuit significantly pares back agency power, mitigates some risk to the industry of a Harris administration. But we note there is some risk that a Harris administration would use the Department of Justice (DoJ) to sue oil companies for climate damages. |
| Food & Beverage | According to the labor department, grocery prices were 27% higher in 2024 than they were in 2019, as food & beverage companies passed along higher costs to the consumer. The Harris campaign has stated that her administration would set limits to combat "price gouging" and would crack down on deals that they say give big food companies power to hike food prices and undermine competition. For enforcement, Harris expects to secure new authority for the FTC and state Attorney Generals to investigate and levy new penalties against companies that violate the new limits. |
| Gaming | We expect modest impact that would stem from economic policies and the corresponding behavior from consumers. Under a Harris administration, we anticipate higher taxes, particularly for individuals/families that are "high income earners." Under a Trump administration, we envision less onerous tax policies and therefore a continuation of robust consumer spending trends. One area that could be ripe for additional legislation is online sports betting and digital gaming, but this may be more of a state-by-state phenomenon. |
| Health Care & Pharmaceuticals | Our view is that there would be limited impact across the health care & pharmaceuticals space under either a Trump or Harris win in November, particularly in a situation where the Senate and House are divided. There is bipartisan support for reduced drug pricing, and both parties would be supportive of continued Medicaid expansion and support for Medicare Advantage/private insurance. One area that could see increased scrutiny would be health care services/distribution, as there would be a high degree of focus on price transparency and reduced margins. |
| Retailing | Trump's proposal of a 60% tariff on all Chinese imports and a 10% tariff on all other goods would be shared between suppliers, retailers and customers. Since 2018, retailers have successfully mitigated tariff headwinds by shifting production to other markets, negotiating prices with vendors, cutting operating expense costs and improving supply chains. The most impacted categories would include crafts, electronics, toys, apparel and footwear. |
| Telecommunications & Media | A Harris administration would be less favorable to the industry, as tax increases and a status-quo regulatory environment would prohibit much-needed industry consolidation and reduce overall competitiveness of large tech-related companies (e.g., Amazon, Alphabet [YouTube] and Apple). A Trump administration would be more favorable for TV and radio broadcasting companies, as they would provide the pathway for M&A opportunities, deregulation and reduced corporate tax rates. |
| Utilities/Power | The potential outcomes for the utilities/power industry would be materially different under Trump and Harris administrations, principally driven by expected personnel changes at the Federal Energy Regulatory Commission (FERC). The President names a chair who sets the FERC policy agenda. The chair position is a political appointment designed to implement the president's policy agenda. Under a Harris administration, the policy agenda would more aggressively direct action and money toward the buildout of a carbon-free electricity infrastructure, stimulated by the IRA. On the other hand, Trump would likely take a more cautious approach regarding the use of the IRA to make any changes toward aggressive clean energy goals, which would prioritize grid reliability and affordability. |
GLOBAL ELECTIONS
Polling Planet—Spotlight on Major Worldwide Elections
In 2024, a significant portion of the world's population has participated in elections, marking a historic and pivotal year for global democracy. India, the world's largest democracy, stood on the brink of potentially redefining its economic and social landscape before its elections earlier this year. Other crucial elections already took place in South Africa, India and Mexico. The EU held parliamentary elections that are likely to significantly influence the bloc's future, as ongoing debates heat up regarding integration and sovereignty of member states. Also, numerous countries across Latin America, Africa and Asia have either already conducted or will soon conduct elections.
This momentous year of elections will not only determine the future trajectories of individual nations, but will also have profound implications for global economic stability, international relations and geopolitical dynamics. Investors, policymakers and global citizens are scrutinizing these developments, fully aware that the outcomes will help define the course of the next decade.
Global Election Spotlight
With 60% of the world's population heading to the polls, key elections in countries like India, South Africa, Panama, and Mexico will shape global economic stability.
Key Takeaways
The 2024 legislative election marked a victory for opposition party Democratic Party of Korea (DPK) against President Yoon and his People Power Party (PPP). DPK won 175 seats, while PPP won 108.
Investment Implications
The election results were a midterm referendum on President Yoon's policies. It will become difficult for President Yoon to push highprofile reforms, including structural modifications to tax and medical sector reform, through the DPK-dominated National Assembly. President Yoon's conservative stance on fiscal policy may face challenges, given the probability of supplemental budget increases.
Key Takeaways
José Raúl Mulino, the candidate endorsed by popular former president Ricardo Martinelli, won the presidential election with 34% of the vote. The election also produced a fragmented National Assembly, with independent candidates capturing 21 of 71 seats.
Investment Implications
The Mulino administration faces several pressing and challenging issues amid a slowing economy and elevated social discontent. After winning only a third of votes in the presidential election, Mulino's political capital is further constrained by a fragmented National Assembly with a large "independent" representation, so he will need to choose his battles and strategize his priorities. We expect volatility to remain high for Panamanian assets as the Mulino administration tackles these essential issues.
Key Takeaways
South African President Cyril Ramaphosa formed a Government of National Unity (GNU) after the African National Congress (ANC) lost its parliamentary majority in recent elections. The GNU partner, Democratic Alliance (DA), is broadly centrist and pro-business. A carefully structured cabinet was announced with retention of several key ANC ministers and the addition of key DA members such as Deputy Ministers of Electricity & Energy and Deputy Ministers of Finance.
Investment Implications
The change in the political landscape has been welcomed by the market and the business community as the GNU opens the possibility for growth-friendly structural reforms and prudent macroeconomic policy. We remain constructive about South Africa's long-term fundamentals and cautiously optimistic on the medium-term macro outlook. We continue to prefer local currency government bonds and see some upside potential in the currency, but we remain mindful about potential volatility due to uncertainty about policy execution under this new government structure.
Key Takeaways
The National Democratic Alliance (NDA) won the 2024 general election with 293 out of 543 seats, resulting in Narendra Modi securing his third term as Prime Minister. However, the party that leads the NDA, Bharatiya Janata Party (BJP), won only 240 seats despite expectations for the BJP to win the majority. Unlike the previous two elections, where BJP won the majority in general elections outright, a coalition government was formed leading to speculations that compromise with alliance members may be necessary.
Investment Implications
There were initial concerns that Prime Minister Modi would need to make concessions on key policies to assuage alliance members. Some of these concerns were addressed with the announcement of budget revisions. While some expected fiscal slippage, the government revised its 2025 fiscal deficit target to 4.9% of GDP from the original target of 5.1%, demonstrating the will to adhere to fiscal consolidation. These factors, combined with strong economic fundamentals and technical tailwinds from bond index inclusion, led us to maintain a positive outlook for India.
Key Takeaways
As expected, Claudia Sheinbaum was elected as the first female president of Mexico. Support for the incumbent Morena party exceeded expectations, with majorities in Congress providing her with power to potentially modify the constitution. This may present both opportunities and challenges. The Sheinbaum administration will need to work closely with the next US administration to capitalize on friendshoring trends.
Investment Implications
Despite reservations over consolidation of power and constitutional changes, attractive investment opportunities remain in Mexico. Tight fiscal policies, potential increased foreign investment from US-China geopolitical tensions, strong remittances and high-risk premia on Mexican assets make local government bonds attractive.
Key Takeaways
In a very well-anticipated outcome, the Labour Party won July's general election, marking an end of the Conservative Party's 14 years in power. Polling had consistently signaled that the Labour Party would benefit from strong voter dissatisfaction with the incumbent government, so the result lacked any surprise element that may have required repricing by financial markets.
Investment Implications
The decline of political uncertainty following the election may stimulate business investment. There is also scope for an improved relationship with Europe, though we do not expect transformational changes. None of this materially shifts the growth challenges that have stymied UK economic prospects. Relatedly, the new government will inherit a fiscal situation that provides very limited room for maneuvering, which should see the gilt market's focus remain on economic developments and the Bank of England's monetary policy normalization.
Key Takeaways
Following a rise in popularity for right-leaning parties at the European Parliamentary elections in June, French President Emmanuel Macron dissolved the National Assembly and called a surprise legislative vote. The newly established left-wing New Popular Front party won, while Macron's party garnered the second-most votes and Marine Le Pen's far-right National Rally party came in third. Nonetheless, no party earned an absolute majority.
Investment Implications
We expect politics-induced volatility to remain high in the near-term, but that very little political action will occur given contradicting views of each party and the broadly equivalent size of each party in the National Assembly. Longer-term, we remain concerned over the growth and fiscal debt trajectory of France and see the recent widening of French government bond yields versus German counterparts as taking valuations closer to fair.
Key Takeaways
Prabowo Subianto took a first-round victory in the recent Indonesian election. The joint ticket with Gibran (Jokowi's eldest son) as Vice President, Prabowo's role in Jokowi's cabinet as defense minister and Jokowi's implicit support, has been a significant factor in the large victory margins. This also suggests that Jokowi's shadow, in the form of policy continuity, will loom large.
Investment Implications
Widespread expectations for broad policy continuity and the coalition required for parliamentary support may narrow options for extreme policy proposals. Cabinet appointments and clarity on policy direction after the presidential inauguration in October are integral levers impacting the future economic outlook.
Key Takeaways
Prime Minister Fumio Kishida announced that he will step down as the leader of the ruling Liberal Democratic Party (LDP) and, by extension, as Japan's prime minister in September. Specifically, he stated that he will not seek re-election in the LDP's upcoming internal leadership contest, a position that effectively confers the role of prime minister. Even if Kishida had chosen to run, his chances of victory were slim due to his low public approval rating, which recently dropped to 25%.
Investment Implications
At this point, predicting the next leader of the LDP–and by extension, Japan's next prime minister–is difficult. However, it's clear that power will remain firmly in the hands of the LDP, with no significant shift toward opposition parties on the horizon. Whoever ascends to lead the LDP and becomes prime minister is unlikely to deviate from the party's core policies. Economic policy is expected to stay largely the same; slow economic growth remains the main challenge. The BoJ's monetary policy should remain unaffected as well. Looking further ahead, the current lower house term ends in October 2025, and a snap election seems unlikely. Given that the opposition party's approval rating trails significantly behind the LDP's, a change in government appears equally improbable.
"Roughly half of the world's population is represented in this year's elections, and over a billion ballots have been cast already worldwide. 2024 is truly the year of the election. Although there were a few notable election surprises relative to broader expectations, Western Asset's long-term value approach allows us to navigate short-term election induced volatility while focusing on opportunities with the greatest potential."
FIXED-INCOME VS CASH
Risk, Active Management and Why Fixed-Income Beats Cash
Election Years and Fixed-Income Markets
Election years tend to introduce uncertainty and potential changes stemming from stated or perceived policy shifts. As investors, we closely monitor electoral outcomes to calibrate shifts in areas like government spending, taxation, trade policies and regulatory frameworks–all of which can serve to influence economic growth, inflation and interest rates. Often, many of these factors contribute to increased volatility and as a result affect investor flows. This makes it even more challenging to predict short-term market movements.
Diversification and High-Quality Fixed-Income Securities
Diversification within various fixed-income sectors can be helpful when navigating volatility during election years as different types of bonds will behave differently in reaction to political developments and economic policy changes. Typically, allocations to high-quality bonds may provide more stable returns as reliable income streams help cushion against severe pricing fluctuations and market instability. This strategic approach to diversification reduces the impact of election-driven fluctuations and provides a more balanced approach to managing risk in uncertain times (Exhibit 4).
Historical Data and Investor Behavior
Historically, investors become risk-averse in US presidential election years, often increasing allocations to cash-like instruments before the election. However, on average, bonds have typically returned more than cash equivalents during and after election years. In addition, inflows into taxable bond funds were twice as large as those into money market funds, with an average increase of over 11% in assets managed in the year following elections since 2000. Unlike cash, bonds usually offer higher yields and the potential for capital appreciation once political uncertainty subsides.
Valuations preceding elections have also varied, but current fixed-income yields offer a more favorable starting point for positive return outcomes compared to the last few elections. While cash may provide more certainty of return outcomes, we anticipate that high-quality fixed-income will offer greater diversification than in recent years, a benefit that cash simply does not provide. In other words, if interest rates decline faster than the market anticipates due to potential policy changes, fixed-income could deliver additional returns. This may help mitigate the impact of declining valuations in equities or other more volatile securities (Exhibit 5).
Investor Flows and Active Management
Over the prior four years, core fixed-income returns have been underwhelming, perhaps leaving traditional bond investors frustrated. During this period, money market funds have seen significant inflows. However, bonds were still able to attract approximately $1 trillion of inflows to both mutual funds and ETFs. Surprisingly, 90.9% of these inflows have been funneled into passive strategies. This is puzzling given that despite recent performance headwinds, active management has consistently outperformed passive strategies, even after fees are considered. It's worth noting that in fixed-income, over the last five years, the median and below average managers outperformed passive, net of fees. In contrast, very few active equity managers outperformed passive net of fees (Exhibit 6).
In the current environment, adopting an active approach to fixed-income investing is particularly prudent. Active managers have the flexibility to adjust portfolios in response to shifting market conditions, policy changes and economic developments, ensuring that investors are better positioned to navigate the complexities of election-driven market dynamics. Simply put, staying invested in bonds through an active strategy can potentially offer better returns and risk mitigation than retreating to cash or allocating to passive options.
BOTTOM LINE
Fixed-income yields may offer higher return potential for the first time in years– especially now that we're in an election year. While predicting results and growth outcomes remains inherently challenging, an active approach can assist in identifying securities that may provide both higher rewards and lower risk. Historically, over most significant holding periods, high-quality fixed-income portfolios have outperformed their passive counterparts.
"This is the first US election year in decades where investors are significantly incentivized to add fixed-income to their portfolios, particularly through actively managed strategies."
Key Convictions
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