July 2024


An investor’s guide to the US election

Our Markets and Financing Research Retreat offers a wide range of academic expertise and timely market insights.

The United States presidential election has become a nail-biting event that defies even the most sophisticated forecasting models and polls, according to Daniel Drezner, professor of International Politics at The Fletcher School of Law and Diplomacy at Tufts University.

Drezner, State Street Associates’ newest academic partner, delved into the factors contributing to this unpredictability and explored potential outcomes of the election, including the implications for markets, foreign and monetary policy, during this year’s Markets and Financing Research Retreat in Boston.

No reliable gauge

According to Drezner, there are typically three ways to assess a winner: political science fundamentals models, polling and political pundits. But the instability of the current political landscape complicates their reliability.

“Fundamental models tend to predict the incumbent would win, and Joe Biden is the incumbent. Looking at the polls, they show a toss-up and that’s been the constant throughout the year. And if you rely on DC folks, everyone down there thinks Donald Trump is going to win…mostly because Trump does things that would mortally wound candidates, but he just keeps going.”

So, what’s behind this tumult? Drezner attributes it to four factors:

  • No incumbency advantage – Both candidates are technically incumbents
  • 2020 nostalgia – Voters feel the world and economy were in a better state in 2020 than it actually was
  • Perceived state of the economy – Most Americans incorrectly believe the US is in a recession
  • Perceived state of the world – Violence in Gaza and Ukraine, US-Mexico border chaos, etc.

Why it’s harder now

Until 2020, individuals most likely to turn out to vote were Republican and were either well-informed or older, particularly during off-year elections. Presently, however, the voters most likely to show up are Democrats. College educated and older voters have started to migrate to Biden, explained Drezner.

“Trump is doing well among voters who did not vote in 2020, those who are barely attached to voting and barely paying attention to the issues and that makes prediction really hard.”

Voter mindset complicates election forecasting even further. Drezner pointed to a recent poll indicating that many Trump voters weren’t aware that the former president was on trial in New York. Once they learned he was convicted, some of their views on Trump shifted, narrowing his current slight lead over Biden in polls. But, as Drezner noted, most people don’t make decisions in June that carry over into November, so prognosticating in an environment where things change quickly is tough.

Implications of a second term

Whether voters choose Trump or Biden, the results of the election will have far-reaching impact not only here at home, but across the globe.

If Biden wins, Drezner predicts there will be contentious debate around the debt ceiling that could spark another showdown over whether to pay the country's bills or default. Under a second Biden administration, he says, the country may see further actions on anti-trust and unionization polices. As for foreign policy, we can expect the status quo.

If Trump gets elected, Drezner foresees an “extremely volatile” first year that could put the country on “an inflationary spiral.”

“Everything he wants to do from high protectionist barriers, reducing the labor supply, massive tax cuts on top of the existing tax cuts, all of that will be inflationary.”

That, in turn, could lead the Federal Reserve to once again increase interest rates to tame inflation.

We may see a much more militarized foreign policy in the northern hemisphere under a second-term Trump administration. For example, some Republicans say they would like to use military force against the drug cartels in Mexico. We may also see nuclear proliferation among our allies, said Drezner, particularly if Trump pulls the US out of NATO.

With fewer than six months to go, the US presidential race is still too close to call. Once reliably predictive methods, like polls and models, are less exact, in part due to shifting voter dynamics and inattentive voters. The only thing certain about the 2024 US presidential election outcome is that it is less certain than ever.

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