There are two outcomes likely in next month’s presidential election, Franklin Templeton managers told attendees at a webcast this morning, entitled “From the Polls to Your Portfolio: Navigating the U.S. Presidential Election.”
Those two outcomes are either a Republican sweep of the White House, Senate and House of Representatives or a Democratic victory in the presidential race and the House, combined with a Republican Senate.
The panelists included Steve Dover, chief market strategist of the Franklin Templeton Institute; Sonal Desai, CIO of fixed income; Grant Bowers, a portfolio manager and analyst in the firm’s equity group; and Jeff Schulze, head of economic and market strategy at ClearBridge Investments.
Both Bowers and Schulze devoted a good part of their discussion to the possibility of a red sweep, which looked suddenly possible in recent weeks as former President Trump’s poll numbers have improved. Schulze said it looks like Republicans might have “a thin majority” and added “it might be beneficial” for markets. He also said that some market participants “appear to be front-running” a Trump presidency.
Republicans, in his view, would probably enact “full expensing of R&D,” which could help industries with hefty capital expenditures like telecom.
Animal Spirits
The expectation of reduced regulation could also trigger a burst of “animal spirits.” When Trump was elected in 2016, the National Federation of Independent Business saw one of the biggest jumps in small business optimism in its history.
Nonetheless, an increase in tariffs would “act as a tax” for U.S. consumers, Schulze warned. And constraints on immigration could affect agriculture prices.
Franklin Templeton’s team also appeared only modestly concerned about Trump’s tariff agenda. Bowers said, “The markets are telling us that any tariffs would be targeted” and not implemented in “full force” like Trump says. However, he added that hefty tariffs on China would show up in the prices of electronics, clothing and sporting goods.
Bowers maintained that both parties are suspicious of the power of Big Tech companies, and he expects the stock market to look beyond tech to continue to “broaden out” as it has been doing for the last few months. If tech stocks are overextended and there’s an anti-tech regulatory backlash in Washington, it could have implications for tech investors. They expect a more lax attitude toward tech mergers in a Republican administration.
One industry that would benefit from a GOP sweep is financial services. There, antitrust scrutiny would diminish and the oversight of activities like credit card fees would decline.
Bowers cautioned investors not to become overly optimistic about investing in energy under a future Trump administration, as demand, “not just supply,” matters. “You can drill [for oil and gas] and produce it, but you need a market to consume it” at a profitable price, he noted. Additionally, energy companies are in a “shareholder value mode,” not an “all-out production mode,” he said.
Schulze also warned against attaching too much weight to who controls Washington when selecting stocks. Some investors thought former President Obama would negatively affect health care shares, yet the sector performed quite during his tenure. And despite former President Trump’s efforts to boost the oil industry, energy was the worst-performing sector during his administration.
Schulze noted that since 1932, the stock market had generated annualized returns of 8.9% under Democratic administrations and 5.6% under GOP administrations. However, when one takes a 10-year time horizon and annualizes forward returns, they become much closer—6.4% for Democrats and 6.1% for Republicans.
Going back to the Gerald Ford administration, the stock market displayed positive returns under eight out of nine presidents—the exception being the George W. Bush administration. President Bush had “bad luck,” Schulze said, beginning his presidency as the tech bubble was unwinding and ending it in the middle of the Great Financial Crisis.
Both former President Trump and Vice President Harris would enter office enjoying a good economic backdrop. Schulze cited the latest “blockbuster jobs report” and the strength of U.S. consumption as two positive indicators. GDP grew at 3.0% in the second quarter, and the Atlanta Fed is estimating it will grow at 3.4% in the third quarter.
Healthy Consumer
He noted that consumer savings remain relatively strong without “meaningful re-leveraging.” At the same time, corporations’ profit margins have climbed since 2023, reducing any potential urge for layoffs next year. Finally, markets are pricing in another four rate cuts.
Grant Bowers told attendees that markets dislike uncertainty, so almost any outcome could be viewed as a positive. “Both candidates are relatively well-known,” he said. Markets performed well under Trump, and since a Harris administration is expected in many ways to be a continuation of the Biden administration, the last four years have also been good for equities.
Markets typically favor gridlock, so he suggested a sweep by either party might add to volatility. At present, “there is a lot of optimism in the market for [former] President Trump,” Bowers said. Investors like his “pro-business, low-tax” agenda, but there is concern about tariffs and the federal debt.
Desai, the firm’s fixed-income CIO, said the bond market “remains optimistic” about rate cuts and the reduced odds of a recession. If there is a Republican sweep and broad tariffs, she said, it could limit rate cuts. But the firm’s baseline case is not “to see a full range of tariffs.”
Elections tend to increase uncertainty, but Desai said the firm isn’t seeing much of an impact on consumers or retailers. Moreover, she pointed to the “strong reversal” of labor market weakness earlier this year.
A big issue facing the next administration will be the expiration of the Trump tax cuts. However, Desai observed that even Democrats want to keep those tax cuts in place for individuals who earn under $400,000 per year. Both Trump and Harris have thrown out “lots of interesting ideas” in terms of new tax cuts and spending, though Desai appeared to believe most had slim chances of becoming law. That’s why she expects “pretty unprecedented” federal budget deficits of 7% or 8% to continue for the near term.
The Franklin Templeton managers urged listeners not to succumb to the temptation to engage in short-erm trading during what could be an uncertain election outcome in November. But looking 12 to 18 months out, Schulze said it could prove to be fortuitous to invest now. Six months after all presidential elections since 1984, stocks have been in positive territory after every election except 2000 and 2008, he explained.
