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As former President Donald Trump and Vice President Kamala Harris duke it out in the tight White House race, investors have illustrated how they believe each candidate’s policies may impact various sectors of the market. Indeed, equity rotations have been influenced by changes in polling results, with traders adding to value and small caps while trimming growthier areas within stocks. But predicting the event’s outcome is difficult, which in turn complicates efforts to successfully enact tactical portfolio changes. Additionally, Congress may not approve policies that a new president has vowed to implement, further clouding the outlook. Indeed, while the IBKR Forecast Trader is expecting a Trump victory, it’s also projecting a split Congress.
This is commentary on economic, political and/or market conditions within the meaning of CFTC Regulation 1.71 and is not meant to provide sufficient information to base a decision to enter a derivatives transaction.
Source: ForecastEx
A Different Portfolio Approach to the Election
In such an environment, IBKR Forecast Trader contracts provide portfolio exposure to the election outcome regardless of how the race for the White House impacts financial assets. As such, they can provide a hedge against the unexpected impact of the election upon individual sectors. If you’re overly exposed to sectors perceived to benefit under a GOP Oval Office, buying the Trump No or Harris Yes may cushion some downside. On the contrary, purchasing the Harris No and Trump Yes may be prudent for a portfolio overly exposed to equity components expected to benefit from a Democratic White House.
Deep Divide in Proposed Policies Surfaces
The following brief looks at the significant differences in the candidates’ policies which are motivating rotations into small-caps, value and bitcoin.
- Trump has proposed cutting taxes, including those imposed on Social Security income. He would seek to extend his 2017 Tax Cuts and Jobs Act, which has many provisions that would otherwise expire next year. The law permanently lowered the corporate tax rate to 21% and included preferable treatment for certain companies. Among other provisions, it also eased individual taxes on a temporary basis. Many of the act’s features, especially for individuals, are set to expire next year.
- Trump is also proposing to eliminate many regulations that he believes are choking the business community, including financial firms, at a time when capital reserve requirements are being scrutinized by the Biden Administration.
- On trade, he proposes adding tariffs as high as 20% for most imported goods and substantially higher fees on products from China, a change he believes would bolster American manufacturing and competitiveness.
- Regarding energy, Trump has pledged to eliminate investments in alternative power and shift resources toward the hydrocarbon industry.
- To address the nation’s housing crisis, Trump plans to open federal lands for development and tighten enforcement of immigration laws to reduce housing demand. He also maintains he can lower inflation through supply-side forces, which would place downward pressure on mortgage rates.
- Harris has proposed restoring the previous 28% tax rate on big businesses, and she would quadruple the tax rate on corporate stock buybacks to encourage firms to invest in growth and productivity. She would provide grants for business startups.
- For individuals, Harris would increase taxes on incomes exceeding $400,000 annually while allowing long-term capital gains to continue to be nontaxed for individuals making less than $100,000 a year. She would keep the 20% rate for Americans with incomes ranging from that amount to up to $1 million annually. She would then increase the long-term capital gains rate from 20% to 28% for those individuals who earn more than $1 million. At the same time, she would increase the childcare tax credit.
- Harris appears content with the current regulatory regime so if she lightens requirements on businesses, the changes are expected to be less significant than the Trump proposal. Additionally, as a former California attorney general, Harris emphasized consumer protection, including within the financial industry. Following last year’s collapse of California-based companies First Republic Bank and Silicon Valley Bank, Harris is expected to support continuing, or even increasing, financial regulations such as capital reserve requirements.
- To make housing more affordable, she has proposed providing first-time homebuyers with a $25,000 incentive and having the government partner with businesses to build 3 million residences.
- In other matters, she has pledged to fight inflation by passing laws that would fight price gouging, and on trade, she is likely to use tariffs on a targeted basis.
Dealing with Election Uncertainty
IBKR Forecast Trader contracts allow investors to gain portfolio exposure to the election outcome and are immune from shift sentiment regarding economic sectors and trends.
As of this morning, for example, the contract with a Yes answer to the question “Will Donald Trump win the US Presidential Election in 2024?” is priced at $0.54 while the No is at $0.46. The correct contract would pay $1.00 plus interest regardless of how investor sentiment toward individual equity sectors shifts in response to the election outcome.
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