When analyzing the impact of the upcoming U.S. presidential election on financial markets, it is crucial to consider the differences in monetary policy between the candidates. The current administration, led by Donald Trump, has seen a trend towards a more hawkish approach to monetary policy. Trump’s picks for the Federal Reserve Board, such as Christopher Waller and Michelle Bowman, have been known for their resistance to dovish outlooks, indicating a preference for tighter monetary policies. Additionally, the appointment of Jerome Powell as the Federal Reserve Chair has further reinforced this inclination towards a hawkish stance.
On the other hand, Joe Biden’s choices for the Federal Reserve Board, including Lisa Cook and Philip Jefferson, do not necessarily signal a significant shift towards a more dovish approach. While Biden’s stance on monetary policy remains somewhat unclear, it is unlikely that there will be a drastic departure from the current path set by the Federal Reserve. Therefore, it is questionable whether there will be substantial differences in monetary policy calibration or independence under either candidate, especially in the early days of a new administration.
Another crucial aspect to consider is the impact of the presidential election on fiscal policy and its implications for financial markets. During his tenure, Trump maintained a relatively stable debt-to-GDP ratio, hovering around 105% before the onset of the COVID-19 pandemic. Despite concerns about fiscal responsibility, Trump’s approach to fiscal policy did not appear overly profligate.
In contrast, Biden’s record reflects a willingness to run larger deficits, particularly in response to economic challenges posed by the pandemic. While this might raise red flags regarding fiscal discipline, Biden has also taken steps to reduce the debt-to-GDP ratio post-COVID peak levels. Ultimately, it is unclear whether there will be significant differences in fiscal policy between the two candidates that could drive market dynamics.
Regarding trade policy, both Trump and Biden have demonstrated protectionist tendencies and a reluctance to promote free trade agendas. Trump’s tariffs on various goods and Biden’s failure to remove them suggest continuity rather than divergence in trade policies. Any differences between the candidates may be more related to distributional issues than fundamental changes in trade policy.
While Trump may take a more aggressive stance towards China, both candidates are likely to prioritize protectionist policies with populist undertones. As a result, the impact of trade policy differences on financial markets may be minimal, as both candidates are unlikely to embrace a free trade agenda.
Despite stark differences in immigration policies between the candidates, the implications for financial markets may be limited. The economic impact of changes in immigration flows, whether legal or illegal, is unlikely to significantly influence market trends. While increased migration could have effects on lower wages and aggregate demand, translating these effects into market movements is a complex task.
It is essential to acknowledge the importance of immigration policies in shaping broader economic trends, but their direct impact on financial markets may be less pronounced. Therefore, it is questionable whether the disparities in immigration policies will drive significant market shifts in the aftermath of the election.
Regulatory Policy
Perhaps the most critical factor to consider when evaluating the potential market impact of the presidential election is regulatory policy. The contrast between Trump’s deregulatory agenda and Biden’s regulatory approach could have profound implications for various sectors, including energy, healthcare, technology, consumer goods, and financial services.
Trump’s emphasis on deregulation, as evidenced by his executive orders and actions during his presidency, has contributed to a surge in small business optimism and market growth. In contrast, Biden’s regulatory proposals may lead to a more restrictive environment for businesses, potentially dampening market sentiment.
The outcome of the election will likely hinge on the divergent regulatory paths set by each candidate, with a Trump victory potentially sparking a positive supply shock that boosts stock markets. On the other hand, a Biden win may lead to a more subdued market response, maintaining the status quo in terms of regulatory policies.
While the presidential election is poised to have implications for financial markets, the extent of these impacts remains uncertain. The nuances of monetary, fiscal, trade, immigration, and regulatory policies under each candidate may shape market dynamics in distinct ways. However, the interplay of these factors and the broader economic context will ultimately determine the trajectory of financial markets post-election.