Authored by: Paulo Pilar, Ashley Tan, Bettina Rey
Edited by: Elijah Soriano, Ethan So, Justin Choi, and Jared Go
Introduction
Last November 5, 2024, Republican vote, Donald Trump, dominantly won the seat of the US President against his democratic counterpart, Kamala Harris (Hayes, 2024). This win has been long anticipated by analysts to shake up the market and economy not just domestically, but even globally (Baird, 2024). A few major aspects that Trump’s presidency could visibly impact are (1) market volatility and uncertainty, (2) fiscal policy, and (3) the global economy, primarily on the potential implementation of his desired tariff policies.
Market Volatility and Uncertainty in Election Season
A direct manifestation of an upcoming election in a given country can be seen in the movements of the stock markets. In particular, investor sentiment is the biggest driver when it comes to how the stock market changes during election season as it reflects the collective emotions and expectations investors have, which are influenced by the current elections (Smith, 2023). The market reflects these expectations most notably the possible outcome of the elections and how the winning administration's policies can affect different sectors and businesses.
Historically it can be seen that in the months leading up to the elections, stock market volatility tends to rise and peak around election day. Driven by this fear of uncertainty, the CBOE Volatility Fear Index (VIX) has shown these sentiments as the months leading up to this year's elections reflect this trend indicating a great fear and uncertainty in the current market. Notably, it can be seen that the index has broken the 20-pt threshold three times in this electoral season (Chicago Board Options Exchange, 2024)
Figure 1. VIX
Source: TradingView
Furthermore, past historical data suggests the same trend during election seasons as the graph of the average VIX level during election years indicates the same upward trend up until election day (Baird, 2024). Following the results of the elections, the performance of major stock market indexes reflects this increased volatility.
Figure 2. Average Daily VIX Levels
Source: YCharts
According to historical stock market data gathered by CNBC, it was found that the performance of the top three US stock Market Indexes–the S&P 500, the Dow Jones Industrial Average, and the Nasdaq Composite–following the end of election seasons over the past 40 years have seen gains between election day and the year-end (Banton, 2024). This, however, comes at a slight decline during the initial days or weeks after election season ends. The average losses of all three indexes the week following the elections from 1980-2020 was -0.76%. The S&P 500 specifically experienced a -0.84% loss, while the Dow and the Nasdaq lost -0.41% and -1.03% respectively (Hayes, 2024).
Figure 3. Performance of the S&P500 After Elections
Source: CNBC
Policy expectations as well as the economic uncertainties that stem from the elections can lead to drastic market fluctuations, either driving prices up or down. However, while this may be the case, it is important to take note that fundamental factors such as corporate profits as well as the growth of the economy still remain as a bigger indicator of long-term market performance (Saglimbene, 2024).
Delivering Major Tax Cuts
In lieu of Donald Trump’s recent presidential election win, more aggressive, rather than conservative fiscal policies are anticipated. Trump is committed to fostering a pro-investment environment. Because of this, a recurring pledge on the campaign trail includes policies focused on expansive tax cuts to increase disposable income for individuals and corporations—ultimately stimulating economic growth.
From an economic theory perspective, this approach should create both a supply and demand-side push. This theory suggests that lowering taxes and reducing regulations can spur economic growth. Through tax reductions, corporations would have more capital to invest in expanding operations, hiring workers, and increasing their output. Likewise, consumers would also have more spending power, driving consumer demand and spending. Increased government expenditures create job opportunities, thus reducing unemployment and boosting aggregate demand.
According to the World Bank’s data (n.d.), US GDP rose from 2.5% in 2017 to 3.0% in 2018, likely attributed to the lower individual income tax. At the time, the tax rates for all income-earning brackets were reduced except for the lowest-income earning brackets (Tax Cuts and Jobs Act, 2017). Deductions in individual income taxes entailed higher after-tax income, allowing greater spending power. Businesses respond to the uptick in demand by ramping up production, boosting economic growth.
While individuals and corporations may positively perceive the lower tax rates as beneficial for their personal gains, these changes can reduce federal revenues, potentially leading to a budget deficit. Previously, corporate tax revenue dropped by 40% (Chodorow-Reich et al., 2024). Extending tax cut provisions would approximately entail a $1.834 trillion deficit for 2024, the highest since the pandemic. Even worse, Trump’s plans may incur $7.5 trillion in new debt (Lawder, 2024). Ultimately, extending these tax rate cuts could exacerbate the federal budget deficit.
Reviving Tariffs
With Trump’s return to the presidency, an aggressive tariff policy could once again be revived, placing higher taxes on imported goods from other countries. During his campaign, Trump threatened to place tariffs as high as 60% on China while also placing a 20% tariff on all other imported goods (Johnson, 2024). This is part and parcel of Trump’s main economic initiative of ‘protecting’ and ‘bringing back jobs’ to America. However, the real effects and consequences of Trump’s tariff policies bring stark support and criticism both in the US and abroad.
Back in 2018, Trump imposed significant tariffs on solar panels, washing machines, steel, and aluminum with tariff rates ranging between 10% to 50% from most countries. Trump also escalated tariffs on imported goods from China. In retaliation, China likewise imposed tariffs on US goods such as beans, pork, and other products. The infamous US-China trade wars in 2018 particularly hit US agriculture hard as farmers needed government aid and support. While jobs were indeed created in some protected industries like steel, the rest of the economy suffered. A study cited that the tariffs led to a monthly reduction of $1.4 billion in aggregate U.S. real income by the end of 2018 (Amiti et al., 2019). This was because tariffs caused higher consumer prices as most companies relied on imported inputs and passed down the rise in costs to consumers. This resulted in layoffs and closures, leading to an overall welfare loss for the American consumer. This can be seen through an uptick on the prices of major household appliances.
Figure 4. Major Appliance CPI
Source: BLS
Considering that the first round of tariffs is said to take effect as early as February 2025, analysts are forecasting that Trump’s aggressive tariff policy may cause the same effects as it did back in 2018. In fact, countries such as Mexico and Canada are already responding to these tariff threats with their retaliatory tariffs. Meanwhile, corporations are preparing for supply chain disruptions caused by these tariffs, and may even plan to shift their operations to different countries to avoid hiked prices. These uncertainties caused by Trump’s planned tariffs may continue to have ripple effects on the stock market, global trade, and beyond.
The Road Ahead
The 2024 US elections have undoubtedly caused significant economic shifts, the effects of which are yet to be truly seen. The stage has been set as market volatility, fiscal policies, and trade tariffs could reshape the economic landscape. Historical trends that show the relation between investor psychology and main market indexes, fiscal policies that can serve as a double-edged sword, and the impending effects of tariffs and trade policies highlight the complex interconnections that could define the global economy’s trajectory post-elections. However, it is important to take note that we can only speculate on the long-term effects of the elections on the economy. While these insights serve as a way to gauge the direction of the economy, the true impact of the elections is yet to be seen as the policies implemented have yet to unfold.
References
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