AUTHOR’S NOTE: This research was conducted prior to the July 21, 2024 announcement that President Joe Biden would not seek reelection. Later in this column, you will see the relevant explanation, “given the significant media attention that has been given regarding President Biden stepping down as a candidate, take note that it would be appropriate to swap out the name ‘Biden’ with ‘Candidate-X’ as it is expected that the policy initiatives would remain strikingly similar if not the same.” Given the announcement by Biden, it is appropriate to elevate that consideration to the top of today’s column.
In March 2024, I wrote that the U.S. president is less impactful on the economy than many might intuit. Over the long term, the U.S. economy is influenced much more by demographics (such as the number of prime-age employees, those aged 25 to 54, that will enter the workforce) and productivity (swayed by new technologies and corporate management techniques). The next U.S. president cannot take credit in the next four years for people born 25 years ago looking for jobs today. And neither can they take credit for improvements in workforce productivity garnered through artificial intelligence. However, fiscal policy will undoubtedly influence what happens to the economy during their term.
If there is such a thing as a hyperbolic reality, consider that both Trump and Biden were responsible for trillions of dollars of spending. It is impossible to argue that they did not influence the economy’s direction through their terms. Through 2028, the next president could influence employment decisions through tax credits and the cost of borrowing by the level of deficit spending. Thus, we should reflect on the odds of possible election outcomes and the macroeconomic consequences.
I relied on the incomparable team at Moody’s, led by ace economist Mark Zandi, to determine possible outcomes. Zandi and his fellow authors composed a 34-page report assessing the macroeconomic differences that could occur under different presidential election scenarios.
Moody’s talks “Inside Economics” presented a companion podcast on this topic. The podcast brought up an important consideration: the question of whether the economy performed better under Biden or Trump. However, Brendan LaCerda astutely pointed out that a better question is whether the president’s first term would be a predictor of a second term. LaCerda pointed out a few examples that echoed my earlier point that the state of the economy over the long term is primarily influenced by things that are out of the control of the president. Also, unpredictable exogenous events could easily disrupt an economic path, and how the president reacts will dictate how the economy responds. While we might hope to be safe from such events, the most reliable prediction is that something unpredictable will happen! LaCerda reminded us that insanity is described as doing the same thing over and over and expecting a different result. Conversely, we should not expect the same results from doing the same thing repeatedly. For example, increasing tariffs or spending trillions of dollars post-pandemic might only work once (if they did in the first place) because we are capacity-constrained. The medicine that was prescribed previously could now kill the patient. And if I am being cynical about it, I don’t know if one candidate or the other understands this—or, perhaps, they know it, and they will use past performance to persuade legislative votes aimed at their agendas.
Below is a list of presidential election scenarios, ordered from most likely to least likely.
It is worth noting that this report was completed on June 20, 2024, a week before the first Biden-Trump debate, after which many polls shifted positively for Trump. Also, although the July 13 assassination attempt did not shift polls as meaningfully, that event could affect turnout. Nonetheless, this exercise is meant to be less of an election-prediction tool and more of a preparedness tool. Also, given the significant media attention that has been given regarding President Biden stepping down as a candidate, take note that it would be appropriate to swap out the name “Biden” with “Candidate-X” as it is expected that the policy initiatives would remain strikingly similar if not the same.
Scenario 1, a Biden win with a divided Congress, is the “status quo” scenario and Moody’s baseline (referred to as their “May baseline” because that was their prediction in May 2024; Moody’s has made no public changes to the odds or the impacts of their scenarios since then). The Tax Cuts and Jobs Act (TCJA) expires at the close of 2025, with the exception that Biden extends the current lower tax rates for individuals making less than $400,000. In this scenario, the economy runs near its potential, and the unemployment rate stays around four percent. Inflation steadily moderates and returns to the Federal Reserve’s two percent target by summer 2025.
Scenario 2, a Trump win with a Republican sweep in Congress, would make the TCJA permanent. There are higher tariffs on China, fewer migrant workers, and deregulation, allowing for mergers and acquisitions that were delayed under Biden to occur. Trump’s tariff and immigration policies would initially result in higher inflation and weaker economic growth. A recession is more likely in the first part of Trump’s term than under Scenario 1, but the economy bounces back more favorably by the end of Trump’s term.
Scenario 3, a Trump win with a divided Congress, sees the president trying to pass all the policies mentioned under Scenario 2 but hitting several roadblocks or compromises. More moderate tariff policies and a higher number of workers than under Scenario 3 reduce the recession probability of Scenario 2.
Scenario 4, a Biden win with a Democratic sweep in Congress, would result in significantly higher corporate income and household capital gains tax rates. Further fiscal spending would be aimed at supporting low-income households. Moody’s expects a better economic performance under Scenario 4 than Scenario 2 and 3, but less than their baseline (Scenario 1). Lower corporate earnings would be a drag on the stock market.
Below is Moody’s chart predicting Gross Domestic Product growth under the four scenarios (as a reminder, “May baseline” refers to Scenario 1, a Biden win with a divided Congress).
And here is Moody’s chart predicting job creation under the four scenarios.
I am no political prognosticator; pollsters haven’t been good at predicting outcomes, either. As a professional investor, I expect to be more reactive than proactive when adjusting investment portfolios. And to be clear, I would not expect my reactions to be knee-jerked the day, week, or month after the election. However, many other investors—especially those invested heavily in equities with no hedges—may be getting more nervous about the election outcome. In that case, I will remind you of the advice I gave in my March 2024 column. If you feel the need to raise cash in your portfolio, consider the following:
- Sell just enough to put you at ease for now;
- Take any tax losses found in non-tax-deferred accounts;
- If there are no tax losses, place trades in your tax-deferred accounts to avoid having to pay taxes;
- If no tax benefits are available, talk to your money manager to see if you should reduce every allocation equally or target specific asset classes (i.e., sell foreign stocks first and domestic stocks last, or sell more small caps than large caps).
I would short the stock market only under Scenario 4 (i.e., make an investment that rises if stock prices fall). Biden wants to raise corporate tax rates from 21 percent to 28 percent and increase capital gains rates from 20 percent to 39.6 percent. This should rerate stock price multiples significantly downward.
Under Scenario 2, I see how more tariffs and fewer workers could tip the U.S. economy toward recession. In that case, I would consider reverse-dollar-cost-averaging out of equities and into something more conservative.
The best case for the stock market, whoever wins the presidency, seems to be gridlock. Stocks want politicians to get out of the way of the economy, not manipulate it.
Allen Harris is an owner of Berkshire Money Management in Great Barrington and Dalton, managing more than $700 million of investments. Unless specifically identified as original research or data gathering, some or all of the data cited is attributable to third-party sources. Unless stated otherwise, any mention of specific securities or investments is for illustrative purposes only. Advisor’s clients may or may not hold the securities discussed in their portfolios. Advisor makes no representations that any of the securities discussed have been or will be profitable. Full disclosures here. Direct inquiries to Allen at AHarris@BerkshireMM.com.
