27 Jun 2024
The upcoming US presidential election will be at the forefront of many investors’ minds throughout this year. Our regularly updated election insights provide investors with the information they need as the election story evolves ahead of 5 November.
Last updated: June 2024
Election overview
The first priority for any presidential hopeful is to secure their party’s nomination. In the first half of the year, the presidential primary elections and caucuses take place, with voters in each state choosing who they want to select as the party nominee. Following these elections, the winners are formally appointed at the parties’ respective national conventions in the summer. This marks the end of the primary phase of the race, with the general election campaign ramping up before voters head to the polls on Election Day. The winner is then inaugurated the following January.
Source: 270towin, National Conference of State Legislatures, J.P. Morgan Asset Management. Data as of 7 June 2024.
The race for the White House is the main focus, but a president’s ability to achieve their policy goals is influenced by who controls Congress
American voters will be asked to make three key decisions on 5 November: who they want to elect as President, and who they want to serve in the Senate and the House of Representatives (the House).
The presidential candidate that wins the greatest number of votes (or wins “the popular vote”) does not automatically become president. Instead, the US employs an electoral college system. Votes are tallied at the state level, and the winner earns the “electoral votes” that belong to that state (with the number of electoral votes in each state determined by population size). A candidate needs to win at least 270 of the total 538 electoral votes to win the presidency.
The Senate is one of the two arms of Congress that form the legislative branch of government. Despite some nuances between the Senate and House, they have similar functions and must both sign off on new legislation. However, the Senate has unique authority in some areas, such as the confirmation of presidential appointees.
One of the main differences between the Senate and the House is who they represent. Each state appoints two Senators to represent the entire state. US Senators serve six-year terms, which means that roughly a third of the 100 Senate seats are up for grabs at each federal or mid-term election. Currently the Democrats control the Senate. There are 34 seats up for election this year, 23 of which are held by Democrats or Independents. To win control of the Senate, the Republicans would need to keep all of their existing seats and flip one seat if they win the presidency, or two if they do not, as the Vice President casts tie-breaking votes.
The House of Representatives is the other arm of Congress. Members of the House represent individual districts within a state and serve two-year terms. They are generally expected to be more responsive to their constituents than Senators given they represent fewer people and serve shorter terms. Each of the 435 seats in the House are up for election in November. Currently the Republicans control the House. For the Democrats to win back control, they would currently need to win five additional seats.
If a president’s party also controls both arms of Congress, the president can typically push through an agenda more easily, particularly on areas of domestic policy that require Congressional support, such as spending and taxes. In a divided government scenario, the president would be limited in what they could achieve, forcing a greater reliance on executive actions and potentially a focus on areas where the president has more discretionary authority, particularly foreign policy.
Votes or seats in the Electoral College, Senate and House of Representatives
While there is a host of potential outcomes from this year’s elections, prediction markets at the start of June show that some seem more likely than others. The retirement of Democratic Senator Joe Manchin, in a heavily Republican state, means that the Democrats will face an uphill battle to retain the Senate. Control of the House could go either way, but given the decline in split ticket voting in recent years– whereby individuals vote for one party in the presidential election and another in the congressional elections – it could well mirror who wins the White House. As such, as of the start of June, prediction markets imply that if the Republicans win the presidency, they could also take both arms of Congress. A clean sweep for the Democrats meanwhile is increasingly an uphill battle.
Prediction market-implied probability for control of the White House and Congress
%
Source: Polymarket, J.P. Morgan Asset Management. Data as of 7 June 2024.
While national polls are useful to track momentum, polls of swing states warrant close attention
Following several surprise outcomes around the world, the reliability of election polls has been increasingly called into question in recent years. The 2020 US presidential election is a good example, where the polling industry delivered one of the biggest misses in 40 years. Joe Biden was expected, on average, to win the popular vote with an 8.4 point margin, but delivered only half of this. Meanwhile in 2016, the polls incorrectly predicted a win for Hillary Clinton. While she won the popular vote (as predicted by the polls) with 48.2% of the vote vs. Donald Trump’s 46.1% share, the polling data over-estimated the margin of victory and Trump ultimately emerged victorious by winning more electoral votes. The polling industry has since implemented a number of innovations to bolster the accuracy of its data, including using a variety of survey methods to paint a more realistic picture of the electorate. This paid off in the 2022 mid-terms, where the average polling error was the lowest since at least 1998. However, we note that for the past two presidential elections, where Trump was on the ballot, polls typically underestimated the extent of his support. Trump’s recent criminal conviction adds another layer of uncertainty; he remains eligible to run for office, but the impact on his popularity is so far unknown.
Given the difficultly in predicting the outcome at the national level, it may be more instructive to focus on regional polls for the “swing states” – the states likely to have the tightest races. In 2020, just over 40,000 votes in key three states – Georgia, Arizona and Wisconsin – separated Biden and Trump from a tie in the Electoral College. We will be watching the regional polls in these three states – as well as Michigan, Nevada and Pennsylvania – extremely closely as we move through the autumn. But as with polling data for any political event, an appropriate margin for error must be factored into any analysis.
What is clear is that it is much too early to trust the polls yet. As the chart shows, polls become more accurate closer to the election.
As we draw closer to the election, we will keep you informed with what the most recent polls are showing. Make sure to revisit the site on a monthly basis to get the latest updates.
Average polling error
%
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While there are areas of alignment between the two parties, they are likely to differ on climate action, the war in Ukraine and the United States’ relationship with its allies
There are areas of both alignment and divergence between the Democrats and Republicans’ policy priorities. In recent years, both parties have shown a commitment to protect domestic manufacturing and grow the strategic rivalry with China. Last month, the Biden administration announced increased tariffs on $18 billion worth of Chinese imports. While the decision created a number of headlines, the near-term economic impact of these targeted measures is expected to be minimal given the tariffs only affect 4% of total US imports from China, and the products which saw the largest increases, namely EVs, are primarily imported from elsewhere. Trump, meanwhile, has suggested that if he were to be elected, he would implement a broad 60% tariff on all Chinese goods entering the United States, and an across-the-board levy of 10% on products from the rest of the world. While a boost to US competitiveness may appeal to many, it could also come at a cost to American consumers. Bloomberg estimates suggest that Trump’s proposed plans would leave consumer prices 2.5% higher and GDP 0.5% lower after two years. Importantly, whether such a policy could receive sufficient congressional support to be implemented is another question. Nonetheless, regardless of who wins the election, it seems that a more aggressive protectionist stance is likely to be adopted.
Limited fiscal headroom should, in theory, weigh on any ambitions to deliver further tax cuts or major spending programmes. With the US fiscal deficit already exceeding 6% of GDP at a time of record low unemployment, closing the deficit would typically be a top policy priority. Whether or not this happens remains to be seen.
The latest forecasts from the Congressional Budget Office (CBO) suggest that the fiscal deficit in the US could remain elevated at 6% of GDP in 2034, while debt could reach 116% of GDP. Crucially, these forecasts assume that the 2017 Tax Cuts and Jobs Act (TCJA) implemented in 2017 will expire in 2026. Taking centre stage of this debate is the decision on whether to sunset or extend these tax cuts. To date, Biden has proposed increasing taxes on corporate, individual and capital gains income for upper income households while expanding tax credits elsewhere, and Trump has pledged to make the individual and estate tax cuts of the TCJA permanent. Under either outcome, deficits are likely to widen, primarily due to rising interest costs, and discretionary spending is likely to be cut, creating a modest headwind for growth and some upside risk for yields. Any further fiscal expansion beyond this would risk an unfavourable market reaction, particularly in the bond market. Many investors are therefore likely to view the election result through the lens of each party’s commitment to fiscal prudence.
Immigration policy will be a key focus for both parties. Immigration has surged in recent years, with CBO estimates suggesting that immigration added 3.3 million people to the US population last year, over three times the yearly average in the prior decade. The American population now consider immigration to be the most important issue facing their country, though these polling numbers are higher among Republican voters and some independents. As a result, Republicans and more centrist Democrats may take a tougher line on immigration to appease voter concerns. Immigration has helped boost labour supply and supported home building. The impact of immigration on inflation is less clear cut – on the one hand it has boosted the supply-side, while on the other hand it has encouraged fiscal stimulus and private consumption. A decision to curtail immigration would therefore no doubt have wider implications for the economy.
Areas in which the two parties are likely to differ include climate action, the war in Ukraine and the United States’ relationship with its allies. Climate is expected to remain a key area of focus for the Democrats. The Republicans, meanwhile, have vowed to accelerate the production of fossil fuels and roll back some of Biden’s green policies. On geopolitics, the Democrats are expected to continue their military support for both Ukraine and Israel, seeing it as vital for US national security interests. It is less likely that support for Ukraine would continue under a Republican president, although foreign policy views do differ across the party. The eventual nominee for the Republican party could therefore have implications for US relations with Europe, as well as geopolitical relations globally.
US federal debt
% of GDP
Composition of US federal deficit
% of GDP
% of respondents mentioning immigration
What is happening in the economy tends to be much more important for markets than what is happening in the White House
Despite the fact that there are some clear policy differences between the two parties, we would urge extreme caution for investors planning to position portfolios around an assumed result.
First, as the old adage goes, a week is a long time in politics. We are still some way off from November’s election; a lot could change and the outcome remains very uncertain.
Second, even if an investor felt certain of the result today, what politicians say they will do in an election campaign and what they eventually can enact are often quite different. Over the last four US elections the successful candidates made a combined 700 campaign promises, but less than half of these have made it into law, in large part due to congressional opposition. If the election results in a divided congress, the winning party could rely on unilateral action, such as executive orders and rulemaking via the federal department and agencies, but enacting larger policy proposals ultimately requires approval by Congress.
Finally, even if an investor felt confident about both the election outcome and the future direction of policy, there will be many other factors driving markets.
History suggests that equity markets tend to see lower average returns and higher volatility in election years vs. non-election years. Yet it is crucial to recognise that these averages are skewed by events that have happened to coincide with an election, notably the bursting of the dot-com bubble, the global financial crisis and the Covid-19 pandemic. What is happening in the economy tends to be much more important for markets than what is happening in the White House.
US equities price return
% change year on year
US equities realised volatility
%, 52-week standard deviation
Source: FactSet, S&P Global, J.P. Morgan Asset Management. Election years are US presidential election years. Election and non-election years are the average annual returns from 1932 onwards. Data as of 7 June 2024.
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