The U.S. Elections Will Impact the Direction of History. What Else to Watch Beyond the Presidential Race?

Although people often focus on the presidential election, congressional elections are also a focal point of contention between the Democratic and Republican parties. U.S. presidential election is held only every four years, while elections for Congress occur every two years—with all 438 seats in the House of Representatives and one-third of the 100 Senate seats up for grabs. On Election Day, November 5, voters in each state will cast their votes for Senate candidates (if applicable) and House candidates from their districts, ultimately electing the new members of both chambers of Congress.

The Senate and House Election Forecast from RealClearPolitics shows that both the Democratic and Republican parties have a chance to win the House elections; for the Senate, the Republicans have a higher likelihood of gaining control.

There are eight possible combinations for the U.S. election results (President x House x Senate, 2 x 2 x 2 = 8). However, only two scenarios are most practical for discussions: the "Red Sweep" (Republicans winning the presidency and both chambers of Congress) and the "Blue Split Government" (Democrats winning the White House and the House of Representatives, while Republicans winning the Senate).

Although U.S. policy is primarily driven by the White House president, having a unified Congress determines the ease of implementing future policies.

A Trump administration likely corresponds to a "Red Sweep," while a Harris administration would encounter a divided Congress. Therefore, under a "Red Sweep," Trump's fiscal policies would be easier to implement, whereas Harris's fiscal policies might face significant cutbacks under a split government. A Harris administration would indicate a less aggressive fiscal stance in the U.S.

Expansionary fiscal policy leads to demand-side inflation, while tariffs and immigration policies contribute to supply-side inflation. Trump's policies, such as imposing tariffs on foreign goods, restricting illegal immigration, and deporting undocumented immigrants in the U.S., would mean that the core U.S. inflation (mainly driven by wage inflation) faces upward risks from supply constraints.

Impact on inflation:Sensitivity test shows that Trump’s impact on core PCE is correlated to potential US tariffs on China. By calculating the proportion of goods the U.S. imports from China (13.5%) * the proportion of core goods in the Core PCE (35%) * the tariff rate, we can determine the extent to which inflation is affected. In extreme cases, U.S. core PCE price index could rise by 0.6%.

Tight monetary policy: Although Trump has a political inclination for low interest rates and a weak dollar, the Federal Reserve is likely to tighten monetary policy (reduce or stop rate cuts) in the face of a more resilient economy and sticky inflation. During Trump's last term, he often criticized Powell on platforms such as Twitter, intervening in Federal Reserve policies, especially around the Fed's interest rate hike in December 2018. However, this did not affect the Fed's decision to raise rates at the December 2018 FOMC meeting.

Asset price impact: For U.S. stocks, expansionary fiscal policy benefits the resilience of the economy, which is good for the earnings of stocks, while tight monetary policy is detrimental to the valuation, favoring large-cap value stocks over small-cap growth stocks overall.

Tight Fiscal Policy:Harris would face greater challenges in policy implementation. Considering that the Senate is likely to be under Republican control, a Harris victory would face resistance to presidential policy initiatives. Most of Harris's advocated policies involve fiscal budgeting and tax law reforms, which demand stricter legislative processes.

Loose Monetary Policy:With fiscal policy providing weaker support for a soft landing of the U.S. economy, the Federal Reserve would consequently have more room to cut interest rates.

Impact on Asset Prices:U.S. stock is likely to be driven primarily by valuation boosts, while gold and copper would see moderate increases. In contrast to the "Trump trade," if Harris were elected, the macroeconomic environment would be more similar to that of 2019. On the one hand, the Democrats' smaller fiscal measures mean more room for monetary policy, resulting in a combination of a weaker dollar and lower interest rates, which would likely lead to a moderate rise in gold prices. On the other hand, the absence of tariffs impacting bulk commodities would reduce the bearish pressure on copper prices, and a weaker dollar would boost copper.

For U.S. stocks, style-wise, small-cap growth stocks sensitive to valuation are expected to outperform large-cap value stocks sensitive to earnings.

1. The impact of election results on major asset classes is not straightforward or linear. The order in which new government policies are introduced after the election, along with non-election-related disturbances, adds complexity to market trading.

2. The impact of new policies will not begin until at least the fourth quarter of 2025. Considering that the president will take office in January of the next year, the proposal process for imposing taxes can then commence. Referring to 2018, the process from proposal to initial implementation takes about half a year, so legally, the earliest that tariffs could be implemented would be Q4 2025, with the earliest impact on prices or consumption appearing in Q4.