US Politics and Policies Quick takes on the US elections

24 Jul 2024

President Joe Biden’s withdrawal from the presidential race on Sunday altered the competitive landscape for the US general election in November. The unprecedented decision by the president to withdraw from the race very late in the campaign leaves the choice of a new nominee to delegates at the Democratic National Convention. Vice President Kamala Harris has consolidated support among enough state delegations to become the presumptive Democratic nominee. She currently faces no meaningful competition.

The rules committee of the Democratic National Committee has decided to hold a virtual roll call vote in advance of the convention to insulate the nomination process from potential legal challenges arising from state filing deadlines. Individuals wishing to become the Democratic nominee must declare their candidacy by 27 July, and obtain the support of at least 300 delegates by the following day, with no more than 50 from a single state. The virtual roll call will commence on 1 August. The candidate winning a simple majority will be declared the party nominee and will be obliged to select a running mate by 7 August to ensure compliance with state ballot requirements.

We expect the Vice President to obtain a majority of votes and be declared the Democratic Party nominee. A ceremonial vote will occur again in Chicago, where delegates also will vote on the party’s policy platform. From that point forward, the pace of the presidential race will pick up dramatically with both candidates seeking to score points in what is shaping up to be a more competitive contest.

In conjunction with the UBS US Office of Public Policy, we are revising our forecast for the election outcome to reflect President Biden’s withdrawal. Former president Trump still holds a narrow advantage but the Harris campaign’s ability to raise $125 million in just two days reflects an uptick in enthusiasm among Democrats and presages a tighter race to the finish.

Source: UBS, as of 24 July 2024

21 Jul 2024

What happened?

President Joe Biden has withdrawn his candidacy for a second term in office and endorsed Vice President Kamala Harris as Democratic nominee. The announcement was made after weeks of deliberation following a disappointing performance in a debate with Republican nominee Donald Trump on 27 June.

The president had been on the receiving end of pleas to withdraw from the race from increasingly senior Democratic Party leaders and top donors skeptical of his ability to govern for another four years.

Former President Trump’s polling lead—both nationally and in swing states—had also widened following a failed assassination attempt last weekend.

Democrats will now need to select a new nominee at their convention in Chicago from August 19–22. Vice President Kamala Harris is widely seen as the front runner.

What comes next?

The focus will now shift to the confirmation of a new Democratic nominee, whether there will be any material differences in their policy priorities that could affect markets, and whether the new nominee will be more likely to defeat former President Trump in November.

First, Biden’s withdrawal and subsequent endorsement of Kamala Harris leaves her well positioned to capture the nomination. But she still must convince convention delegates, who are no longer bound to support Biden, that she is the individual best positioned to defeat the Republican nominee in November. We expect her to emphasize the continuity of Biden’s platform, her service as vice-president, and her ability to appeal to women, younger voters, and voters of color.

Other candidates may emerge prior to the convention, including a handful of governors who could argue that their net favorability ratings are higher than the vice president’s. However, Harris has another point of leverage, which may prove conclusive. In the Biden campaign’s filings with the Federal Election Commission, she is included on the statement of organization, which means that she will encounter fewer legal obstacles in the use of the Biden campaign war chest.

Second, we would not expect a major shift in policy priorities from any of the top Democratic contenders on the issues of concern for investors. The continuity would be clearest if Harris becomes the nominee. But we would not expect any Democratic nominee to deviate significantly from Biden’s focus on climate change, increasing scrutiny of anti-competitive practices by large businesses, and maintaining pressure on China over its trade practices.

Third, Biden’s chances of reelection were undermined by his faltering debate performance on 27 June. It is also possible that Trump’s defiant response to last week’s assassination attempt could consolidate the support of his base, and even win over some undecided voters—though this is not yet clear. Prior to Biden’s exit from the race, we had seen a 60% chance that Trump retakes the White House, with a 45% probability of a “red sweep.” We had also seen a 15% likelihood of a Trump presidency with a split Congress, a 30% probability of a Democratic win with a split Congress, and a 10% probability of a “blue sweep.”

Biden’s withdrawal resets the contest. However, to the extent that Harris is nominated to succeed Biden as the Democratic standard-bearer, we believe the dynamics of the election will not change as much as one might expect. The American electorate is highly polarized and most of Biden’s supporters will be reluctant to abandon the party’s nominee.

Over the coming months, we expect both political parties to focus on turnout in November as the critical factor in the outcome. Democrats must motivate younger voters. Republicans must encourage voters who prefer Trump to express that sentiment at the polls on election day.

We are also reluctant to draw too many conclusions from historical polling of hypothetical matchups between Trump and other Democratic contenders when Biden was the presumptive nominee. It will take time for polls to reflect voter preferences in what are no longer hypothetical matchups but rather real possibilities. Furthermore, we are mindful that there are still three-and-a-half months between now and election day.

Biden’s unprecedented decision to withdraw from the race poses a significant challenge for the Democratic Party but also forces the GOP to devise a fresh campaign strategy against a new and younger opponent.

How should investors respond?

The outcome of the election could be consequential for investors, especially if either party wins control of both the White House and Congress.

A Trump victory—especially if supported by a Republican majority in Congress—would likely raise market expectations of tax cuts and lighter business regulation, while adding to concerns over higher trade tariffs. Primary beneficiaries of regulatory changes could include the financial services sector, while higher tariffs on imports could harm US companies with global supply chains.

Meanwhile, a Democratic administration would likely continue to support initiatives benefiting green energy, efficiency, and electric vehicle makers.

In the near term, we should expect some market volatility as investors digest the news. We have seen some rotation toward “red” sectors and away from “blue” ones in recent weeks as recent momentum has favored the Republican party. That could at least partially reverse in the coming days as markets parse the latest developments.

That said, investors should remember that US political outcomes are far from the largest driver of financial market returns, or even sector performance. Economic data and Fed rate cut expectations remains at least as important. In addition, much can still change ahead of November's ballot and a range of outcomes remain possible.

We therefore advise investors against dramatic shifts in portfolio strategy based on their expectations or political preferences. Instead, we recommend various strategies to manage the risks surrounding the election, including holding a well-diversified portfolio and considering structured investments with capital preservation or yield generation features.

Our base case that the S&P 500 ends the year around 5,900, modestly higher than the current 5,505, would hold in most political scenarios—barring a Democratic sweep of power that leads to higher corporate taxes, or a scenario in which former President Trump imposes trade tariffs that are as high as proposed in his campaign speeches. We consider either outcome unlikely at present. In addition, we believe the positive outlook for top US tech companies is likely to more than offset political uncertainty.

We will continue to monitor campaign developments closely and will keep you informed about the potential implications for the election and markets at ubs.com/electionwatch.

17 Jul 2024

Global investors are growing more confident that former President Trump will reclaim the US presidency this November, with his prospects strengthened by both the failed assassination attempt and President Biden’s campaign struggles. This has put a renewed focus on likely policies in a second Trump term, including a pledge to extend tax cuts and levy higher import tariffs on China.

A second Trump presidency could indeed result in higher fiscal deficits, renewed inflation, and some upward pressure on yields. But the Trump trade itself is not necessarily about higher rates across the curve, but instead underperformance from the long end. Since the pre-debate close on 27 June, two-year yields have come down around 29 basis points, 10-year yields have declined 11bps, and 30-year yields have fallen 2bps.

Looking ahead, we anticipate US rates and government bond yields will broadly continue to decline and suggest investors act now to put cash to work:

Federal Reserve policy will be driven by inflation and labor conditions, not fiscal deficits. Fed Chair Jerome Powell this week made clear that the US fiscal deficit, while a concern “over time,” is outside the Fed’s mandate. Instead, Powell reiterated the Fed remains focused on reining in inflation, and that the latest three data points “do add somewhat to confidence” on progress. Other Fed speakers this week have echoed this sentiment, with San Francisco Fed President Mary Daly saying “confidence is growing” in reaching the 2% target, and Fed Governor Adriana Kugler noting she’s “cautiously optimistic.” We continue to expect the first Fed cut in September.

This means the attractive starting yield from quality fixed income is unlikely to last for much longer. With the Fed likely to join the global rate-cutting cycle soon, we believe US bond yields will fall. The 10-year US Treasury yield is currently trading in the upper range of the past five years, providing a favorable chance for investors to lock in rates that could offer ample buffer against ongoing volatility and attractive portfolio returns as yields fall. We see scope for significant capital appreciation as markets start to price deeper rate cuts into next year, or in the event of a growth shock.

Bonds have historically outperformed cash over the long term while offering diversification benefits. Cash looks set to deliver progressively lower returns as central banks continue on their easing paths. Historically, the probability of US bonds outperforming cash rises with longer holding periods—from 65% over 12 months to 82%, 85%, and 90% over five, 10, and 20 years, respectively. In addition, we note that high-quality bonds are among the safest investments in an investor’s portfolio, as they can preserve capital, reduce equity volatility, and stabilize portfolios.

So, we remain most preferred on fixed income in our global portfolios. We recommend investors position for rate cuts by buying quality bonds, implementing bond ladders, and holding diversified fixed income positions with satellite exposure to riskier credits to improve overall portfolio yields. This also applies to sustainable investments into green, social, and sustainable bonds, as well as those issued by multilateral development banks.

15 Jul 2024

Former president Donald Trump has selected the junior senator from Ohio, JD Vance, as his running mate for the 2024 general election campaign. Trump waited until the start of the Republican National Convention in Milwaukee to announce his choice, which is not unusual. Other presumptive nominees in the past have waited until the proverbial last minute to make such a selection. Trump and Vance will be formally nominated as the GOP candidates for president and vice president, respectively, this week. Vance was on the short list of individuals being vetted by the campaign, so his selection is not a surprise.

In the modern era, presumptive presidential candidates generally have enjoyed an unfettered ability to choose whomever they prefer as a running mate. Personal and ideological compatibility is often the primary criterion, but attempts to diversify the ticket by age, regional origin, race, and gender have all been in the mix. In this instance, age may have been an important factor in Trump’s decision. Vance will be just 40 years old on Election Day, thereby providing a contrast to the two parties’ current standard-bearers. He is an accomplished author but a relative newcomer to national politics, having been elected to the US Senate in 2022.

While the choice of a running mate rarely affects the outcome of a presidential election, the decision is crucial because one-third of US presidents throughout American history have previously occupied the position of vice president. Moreover, in this instance, Trump’s decision effectively anoints Vance as his successor in terms of delivering a populist message to a younger generation of voters.

15 Jul 2024

On Saturday evening, former President Donald Trump was wounded in an assassination attempt during a campaign rally. A bystander was killed, and two others were critically wounded. The assailant was shot dead by security services.

The Trump campaign team said the former president is “fine,” and pictures showed him raising a fist to supporters as he was being escorted away after the attack. President Joe Biden said that he was “grateful to hear that he’s safe and doing well” and that “everybody must condemn” the violence. The assailant was identified, though his motives are still unclear.

What's the context?

The attempted assassination comes at a highly charged moment in US politics, with the campaign marked by intense rhetoric, significant media coverage, and a divided electorate. The shooting took place just over two weeks after the first televised debate between the two candidates, which led to an increase in the polling lead for former President Trump.

Assassination attempts on US presidents or candidates are unfortunately not uncommon in US history. Four sitting presidents and one candidate have been assassinated since the founding of the Republic. In 1981, Ronald Reagan was the most recent sitting president to be wounded in an assassination attempt.

What are the implications for the election?

In the near term, we expect reduced formal campaign activity as security measures are increased and campaign messaging is reviewed. We note that the Biden campaign has already paused communications. This could lead to more controlled and less accessible campaign events, which would impact voter engagement and campaign dynamics.

A key question will be how the assassination attempt affects swing voter attitudes. President Reagan saw an immediate increase in his popularity following the attempt on his life in 1981, though the bump in support ebbed within three months following the incident.

In the aftermath of the recent Biden/Trump debate, we revised our election scenario probabilities, now ascribing a 45% probability to a “red sweep,” 30% to a Democratic victory with a split Congress, 15% to a Trump victory with a split Congress, and 10% to a “blue sweep.”

For now, with the Republican National Convention taking place this week, we leave the aforementioned election scenario probabilities unchanged.

Investment conclusions

The attempted assassination of Donald Trump adds a new layer of complexity to an already tumultuous election season. We have said that investors should not make major portfolio swings in response to campaign developments or in anticipation of any particular election result, and that applies in this case too.

Investors looking to navigate the potential for increased market volatility and to reduce exposure to political uncertainty can consider the following strategies:

In equities, we think investors should manage exposure to individual stocks and sectors that could be more at risk in different election outcomes. This includes the consumer discretionary sector, which would likely suffer from higher import tariffs. To manage potential election-related volatility, investors can use defensive structured investment strategies, such as capital preservation or yield-generating approaches for election-sensitive stocks or cyclical sectors like energy, industrials, and financials.

In fixed income, while we like quality bonds, investors should be mindful of potential risks in longer-duration bonds if concerns about the US deficit increase. In currencies and commodities, we like the safe-haven Swiss franc and gold. We also think investors should manage exposures to currencies sensitive to US trade risks, including the Chinese yuan and Mexican peso.

We will continue to monitor campaign developments closely and will keep you informed about the potential implications for the election and markets at ubs.com/electionwatch.

12 Jul 2024

President Biden began his eagerly awaited press conference on Thursday evening with a review of the NATO Summit in Washington and a recitation of his administration’s accomplishments. His introductory remarks amounted to a vigorous defense of multilateral engagement as the foundation of American foreign policy. They were also designed to establish a more favorable context in which to parry questions from the media over his physical fitness and mental acuity.

His performance was decidedly mixed, however, with spirited comments on the topic of gun control undercut by fumbles over whether his own vice president was capable of assuming the presidency and winning a national election. In short, the presser is unlikely to change many minds over whether he should continue to pursue the nomination at next month's convention.

At least one response may come back to haunt the president. As the press conference was nearing its conclusion, he responded to a question on whether convention delegates should be bound to vote for him. He responded by saying that the delegates “are free to do whatever they want.” The rules currently direct delegates to reflect the “sentiments of those who elected them.” The president may have inadvertently provided his own party’s rules committee with an opportunity to alter the instructions given to delegates and thereby allow them to vote their conscience in the crucial first round of balloting. While the probability of a rule change is still low, the president may have just committed an unforced tactical error. 

28 Jun 2024

In the wake of the first general election debate between Joe Biden and Donald Trump, we have received questions from investors regarding the procedures by which the Democratic Party chooses it nominee. We answer the most frequent inquiries below. We do not express a view on the probability of another individual being awarded the nomination.

1. How are delegates to the Democratic Convention awarded to prospective candidates? Delegates are awarded based on the results of state primary elections. The state-by-state primaries have now concluded.
2. Are the delegates obliged to support the candidates in accordance with the results of the primary elections in each state? Pursuant to Democratic Party rules, delegates must “in all good conscience reflect the sentiments of those who elected them.” This is generally interpreted as a binding commitment, although there is some imprecision in the text of the rule.
3. Can the Democratic Party change the nomination rules? Yes, the Democratic National Committee could change the rules ahead of the convention. But this is unlikely as the overwhelming majority of registered voters affiliated with the Democratic Party expressed their preference for President Biden in his campaign for a second term.
4. Are there enough uncommitted “super delegates" (e.g., current and retired office holders) to alter the result? No. Democratic Party rules state that super delegates are only allowed to cast a vote if a candidate does not win a majority of the delegates on the first ballot. The president has more than enough delegates to win on the first ballot.
5. If the president decides to withdraw before the convention, does Vice President Harris automatically become the Democratic nominee? No. The delegates currently pledged to Biden would be free to vote for whoever they prefer. The vice president would have a distinct advantage, but other candidates could submit their names for consideration and seek support.
6. What happens if the president withdraws from the campaign after the convention? The Democratic National Committee would choose a replacement candidate, but the process is without modern precedent.
7. Are there plans to hold a virtual convention before the planned convention dates in August? Yes. There are plans to hold a virtual roll call vote in advance of the Democratic National Convention in August because the State of Ohio has imposed an 7 August deadline to certify presidential candidates for the November ballot. The virtual roll call vote would allow the party to place a Democratic candidate for president on the ballot in Ohio.

28 Jun 2024

The nationally-televised debate on Thursday evening between America's two presumptive presidential candidates was unprecedented in a variety of ways. First and foremost, while both individuals have a sufficient number of committed delegates to capture their party's nomination, neither one has been formally nominated. No other general election debate is scheduled until the third week of September, after the conventions, which suggests that both campaigns believed they had something to gain from an early engagement.

The structure of the debate, with muted microphones and the absence of a live audience, was expected to favor Joe Biden. It did not. Donald Trump used the format effectively to deflect the moderators' more uncomfortable questions and focus instead on other topics to his advantage. President Biden was very subdued as the debate got underway, with a stiff gait and a hoarse voice. He ceded control of the narrative almost immediately to his predecessor and failed to assuage concerns over whether he could withstand the rigors of another four years in office.

Another debate between the two candidates has been scheduled for September. President Biden, should he choose to accept the Democratic nomination, will affirmatively want to engage in that debate. Former president Trump, now holding an advantage, may be reluctant to offer Biden a second opportunity.

The US electorate remains unnervingly polarized, and we expect to see a great deal of discussion over whether investment portfolios should be reexamined. Adjusting one's longer-term financial plan abruptly in the wake of a single debate more than four months in advance of an election entails risk and may end up being counterproductive. Longer-term portfolio construction is best treated as an apolitical exercise.

However, with that said, for those investors intent on making some tactical adjustments, managing one's exposure to sensitive sectors is a good place to begin. The consumer discretionary and renewable energy sectors could lag in performance in a “red sweep” scenario. On the other hand, the financials sector, has more potential upside in that scenario.

20 Jun 2024

The upcoming US presidential election looks set to increase market volatility. We can already identify a distinct “kink” in the VIX futures curve around November, indicating expectations of higher US equity volatility around the election day.

Recent polls give the Republican former President Donald Trump a narrow lead over Democratic President Joe Biden, at 40.8% versus 40.2% based on FiveThirtyEight’s national polls tracker as of 18 June. Theoretically, that leaves a significant portion of voters who remain undecided and will likely determine the election. However, at this stage in the cycle, national polls may be less useful than polls in the most competitive states.

We assign a 45% probability to a “red sweep” scenario of a Trump victory and Republican control of the Senate and House of Representatives; a 40% probability to a Biden victory with a divided Congress (Republican-controlled Senate, Democratic-controlled House); a 10% probability to a “blue sweep” (Biden victory and Democratic control of the Senate and House); and a 5% probability to a Trump victory with a divided Congress. But the key takeaway at this stage is that the outcome remains uncertain, and no single outcome can be considered as “likely.”

It’s important to remember the principle that investors should vote at the ballot box and not with their portfolio. In particular, we think investors should ensure that political fears don’t lead them to defer investment decisions that would otherwise support their long-term financial goals. Investors should also be aware of how political sympathies can impair objective judgements.

Academic research supports the belief that political affiliation has a direct impact on one’s level of optimism regarding the future direction of the economy.¹ Investors who share an affiliation with the party in office are more likely to believe that financial assets are undervalued and respond by increasing their allocation to equities.² Conversely, investors disappointed with the outcome of an election often adopt a risk-off strategy. This partisan bias can have a meaningful impact on returns.

However, while we believe portfolio construction is best treated as an apolitical exercise, the election will impact markets and government policy. The 2016 election, when Donald Trump was elected, led to divergent outcomes, and while the assets affected may differ this time around, we expect volatility. We therefore think it is prudent for investors to consider the potential risks to their wealth and manage those risks accordingly.

¹Maarten Meeuwis and Jonathan Parker et al., “Belief Disagreement and Portfolio Choice,” National Bureau of Economic Research, Working Paper 2510, September 2019; Yosef Bonaparte and Alok Kumar et al., “Political Climate, Optimism, and Investment Decisions,” University of Miami, February 26, 2012; Marian Moszoro, “The Party Politics of Stock Market Investing,” George Mason University, March 25, 2019; and Harrison Hong and Leonard Kostovetsky, “Red and Blue Investing,” Princeton University, March 2010.

²Bonaparte, Kumar et al., “Political Climate, Optimism, and Investment Decisions.”

31 May 2024

A New York jury found former US President Donald Trump guilty on 34 counts related to the falsification of documents around payment to an adult film star ahead of the 2016 election. This marks the first time a former US president has been found guilty of a crime in the US. The trial judge is scheduled to sentence Trump on 11 July, just days before the 15 July Republican National Convention. Following the ruling, Trump said he was innocent and suggested “the real verdict will be on 5 November.” The case is one of his four criminal trials currently under way in the runup to the November election.

Our view: Early voting begins in June and culminates in the 5 November vote, which means this may be the only Trump trial to reach a verdict prior to the bulk of voting. It is unclear how this court outcome might impact the electorate, but in key swing states, Trump holds a 2–3 point advantage, and surveys indicate inflation and cost-of-living concerns are the primary focus for centrist and independent voters. While a pickup in market volatility can be expected in the lead-up to the election, we continue to believe that portfolio construction is best treated as an apolitical exercise. We expect Fed policy, inflation, and corporate profit growth to remain key market drivers this year, and we continue to see a supportive macro backdrop for quality bonds and stocks.

23 May 2024

Investors don’t like uncertainty, so we shouldn’t be surprised if we see a pickup in equity market volatility as November’s US election nears. In addition, geopolitical tensions, including the ongoing wars in Gaza and Ukraine, have the potential to trigger market volatility. The rise in gold prices following the death of Iranian President Ebrahim Raisi in a helicopter crash this month serves as a reminder of this potential.

As the election nears, market focus on specific policy measures is likely to increase. In the past month, US President Joe Biden announced new tariffs on imports of Chinese electric vehicles, advanced batteries, solar cells, steel, aluminum, and medical equipment. Duties on EVs are to be increased to over 100%. China vowed retaliation, with the Ministry of Commerce saying Beijing would take measures to defend its interests.

With only 4% of US imports from China and less than 1% of China’s total exports impacted, the economic ramifications of the latest tariffs are small. However, the wider trend is that, regardless of which candidate wins the US presidential election, we expect to see more protectionism, more obstacles to free trade, and a fracturing of the status quo ante. We note that while former President Trump initially introduced several tariffs, President Biden retained most of those when he assumed office.

That said, there are likely to be some differences in the way in which protectionism is implemented. We would expect Biden to continue using tariffs on a more targeted basis, with a focus on China and a limited number of other countries. Trump may use tariffs more broadly as a point of leverage to extract concessions, and while his primary focus may be on China, he would likely not exempt geopolitical allies, including in Europe. (For our analysis of the potential outcomes under different scenarios for control of the White House and Congress, see our ElectionWatch report, “Politics beyond borders,” published March 2024.)

Portfolio construction is best treated as an apolitical exercise, but differing policies are likely to mean a different impact on markets depending on the victor. With stock market volatility currently at low levels, this speaks to considering capital preservation strategies within equities, as well as being both selective and diversified in international market exposure.

Gold and oil remain valid geopolitical hedges, in our view. Gold should additionally benefit from strong central bank demand and falling rates. We expect gold prices to reach USD 2,600/oz by the end of the year, as the aforementioned market dynamics likely drive fresh exchange-traded fund inflows. We also see upside for oil prices (we forecast Brent crude at around USD 87/bbl by the end of the year) amid solid demand and efforts by OPEC+ to balance the market. Risk-tolerant investors can consider selling Brent’s downside price risks for yield.