As a blockbuster election looms in the world’s largest economy, Insignia’s super and asset management investment chief Dan Farmer said regardless of the outcome, it will be difficult for the US to address its staggering budget deficit and national debt.
Despite the differences between Republican candidate Donald Trump’s and Democrat Vice President Kamala Harris’s “temperament, beliefs and policy”, one thing they have in common is a lack of serious plans to tackle these challenges, Farmer said in an investment note.
A new study this week revealed that if Harris’s policy proposals were to be enacted, they will increase the US debt by US$3.50 trillion through 2035, whereas Trump’s plan will add US$7.5 trillion.
The Committee for a Responsible Federal Budget, which conducted the study, said the US national debt currently stands at 99 per cent of GDP and is projected to grow from 102 per cent of GDP at the start of FY 2026 to 125 per cent by the end of 2035, based on the Congressional Budget Office’s (CBO) current law baseline.
The debt will exceed its record as a share of the economy – 106 per cent set in 1946 – in just three years. But under either candidate, debt will grow even faster, reaching 133 per cent under Harris in 2035 and 142 per cent under Trump.
The study also estimated that Harris’s plan will introduce US$500 billion of interest costs where are Trump’s will introduce US$1 trillion. Large global asset owners like CalSTRS have warned that the need to service outsized debt and financing deficit will introduce a new level of volatility in fixed income.
But on a policy split, Harris is proposing to raise corporate tax from 21 per cent to 28 per cent whereas Trump is proposing to cut it to 15 per cent.
Farmer said the latter will have “far greater consequences” than Trump’s tariff plans.
“If all his proposed tax changes go through, we expect a significant uplift to US GDP,” he said.
“By the same token, cuts to corporate rates could increase US corporate earnings by 6 per cent, if the corporate tax were to fall to 20 per cent, and rise by 8.5 per cent, if the corporate tax rate fell to 15 per cent.”
An MLC analysis of US presidential elections all the way back to 1960, when it was won by John F Kennedy, suggests sharemarkets tend to be flat up to voting day, and then rally after the outcome.
“It’s possible there will be a repeat of 2016 in which Mr Trump finishes second in the popular vote but secures an Electoral College majority,” Farmer said.
“Another possibility is a repeat of 2020, on steroids, in which Mr Trump refuses to accept the result and wages a protracted legal and political battle, right up to inauguration day [on] January 20, 2025, to try to overturn the result.
“Financial markets will be hoping for a clear-cut result and acceptance of the outcome by the losing candidate, otherwise we can expect market nervousness, until the issue is resolved.”
With that said, perfectly positioning portfolios in anticipation of election outcomes is a dark art that few, if any, investors have mastered. And as long-term players, while super funds can try to manage geopolitical (or just political) risks, some have expressed the view that realistically it is not a place for them to gain an edge.
“There’s plenty for market participants to absorb not just on economic issues, but also the possibility of protracted political tensions if the election result is contested,” Farmer said.
“Considering a range of outcomes is required by carefully discounting campaign rhetoric to various degrees. Estimating post-election policy impact, at this stage, is an exercise in awareness rather than high conviction action.”
