In recent weeks, the polls showed Kamala Harris as the candidate with the most votes, but Donald Trump as the next president of the northern nation (Illustrative Image Infobae)
The upcoming elections in the US appear to be one of the most polarized and tight in recent times. So much so that in recent weeks the polls showed Kamala Harris as the most voted candidate, but Donald Trump as the next president of the northern nation. This is no longer the case, and Trump also seems to lead in popularity, but it does not mean that it serves to illustrate how close this election will be.
How is it possible that Harris led in votes, but that didn’t mean she could be the next president? To answer this question, it is important to keep in mind how elections work in the United States.
Its electoral system is not governed by a simple majority as in Argentina, but through the Electoral College. This is made up of 538 electors (100 senators, 435 congressmen and 3 delegates from Washington DC), who are distributed by States, and are the ones who will “vote” for the next president of the nation. Based on the votes in each State, it is decided how that fixed number of voters will be distributed among the candidates.
The electoral system in the US is not governed by a simple majority as in Argentina, but through the Electoral College
In other words, when a citizen of a State selects a ballot, he is instructing his voter how to vote. Therefore, winning by one vote or with an absolute majority is indifferent within each district. Whether one case or the other, all of the assigned electors must vote for their winner.
Now, for Trump or Harris to be selected to lead the White House, they must accumulate a minimum of 270 voters. In this sense, there are States whose inclination is historically clear (they systematically vote Democratic or Republican), while others, known as swing Statesthey usually rotate according to the candidate of each party. The reason this point is key is that these elections seem to be played in these same States. The election seems to be so close that eyes are on these, which add up to a total of 93 electoral votes.
For Trump or Harris to be selected to lead the White House, they must accumulate a minimum of 270 electors (Photo: Reuters)
Apparently, the polls show extremely close results in favor of Trump in Nevada, North Carolina, Pennsylvania, Wisconsin and Michigan, and a little less so in Georgia and Arizona. If these projections come true, the Republican candidate would win with 312 electoral votes against 226 for his rival. However, if in those States in which the difference is minimal, Harris was voted, she would win by 292 electoral votes against 246 for Trump.
Ignoring the preferences you may have for any of these candidates, the most relevant thing is the impact that each of them could have on the market. Along these lines, one of the points that has emerged as most important for the analysis is the marked fiscal deficit that the United States has shown in recent years, and its future trend.
One of the points that has emerged as most important for the analysis is the marked fiscal deficit that the United States has shown in recent years, and its tendency
Since 2002, North America has not achieved surplus public finances and since the pandemic the deficits have deepened. In fact, in the last 3 years, the negative imbalance has grown from 5.2% of GDP to 6.3%, and going forward neither of the two candidates shows signs of slowing down, since both propose expansive fiscal policies.
Harris aims to increase spending with greater tax pressure that would not be enough to compensate for it, while Trump, in addition to increasing spending, promises to cut taxes. Consequently, the Committee for a Responsible Federal Budget estimates that Kamala’s economic plan would increase Treasury debt by $3.5 trillion over the next ten years, and Trump’s by about $7.5 trillion.
Why is this relevant? Basically because the market anticipates it. Greater debt supply may meet insufficient demand at current rate levels. As always, it’s a question of price. As the Treasury begins to offer higher returns, that demand will begin to appear. The problem is that this dynamic is in contrast to what the Federal Reserve maintained, at least until September.
As the Treasury begins to offer higher returns, that demand will begin to appear. The problem is that this dynamic contrasts with what, at least until September, the Federal Reserve maintained (Photo: Reuters)
Although it is also true that the latest employment and inflation data would point to the Fed remaining more restrictive in the short term, if the entity chaired by Jerome Powell were seeing sectors compromised by high rates, this context could add pressure. After all, it is market rates that govern the economy, not the Fed’s theoretical ones.
For now, the risk does not seem concrete, given that even the paths projected by the highest monetary authority and the market differ by the margin. However, it must be considered that market rates currently arise from a weighing of uncertain scenarios. The reality is that they could continue to climb with a Trump victory. This is because not only are larger deficits expected, but also greater inflationary pressure as a result of its announced tariff policy against Chinese products.
Market rates currently arise from a weighing of uncertain scenarios
However, this scenario could have a second derivative. Contrary to what one might expect from a country with higher inflation, the dollar would strengthen due to an increase in flows directed towards the United States if the rates offered increase. There is logic behind this point as well.
Real interest rates would remain positive, which causes the purchasing power of investments to increase while maintaining instruments considered “risk-free” (perhaps there are rating agencies, such as Fitch, that would not entirely agree with this definition).
Higher nominal and potentially real rates, added to an appreciation of the currency, would imply higher returns compared to other alternatives.
Higher nominal and potentially real rates, added to an appreciation of the currency, would imply higher returns compared to other alternatives (Photo: EFE)
If we add to this that Trump’s tariff policies could impact the activity levels of China, one of the largest consumers of raw materials in the world, the indirect impact on the rest of the emerging countries via reduced demand for their exports It’s obvious. Ergo, the hegemony of the dollar could deepen even further, containing, at least in part, inflationary pressures.
In short, days before the election, the market is swinging between two scenarios that differ considerably. Due to the proximity in the probabilities of victory, the potential divergence between one and the other could be an important point. This makes it important to diversify risks.
What the market favors is eliminating uncertainty
In any case, the historical lesson that the elections have left is that the market has no preferences for the colors of the winning party. Whether blue or red, what the market favors is eliminating uncertainty.
Although there are risks that could materialize in a more restrictive context, it seems that the activity of the North American economy remains firm. Unemployment is well below its average and has not increased substantially, the third quarter had growth of 2.8%, ruling out a recession for 2024, and activity continues to be driven by the services sector.
Ultimately, staying exposed to the US market seems like a good idea no matter what happens in the elections. In this sense, the trade of Trump could be more linked to small caps (small capitalization companies, which can be exposed through IWM’s Cedear) given its nationalist approach and the lag it shows with respect to the S&P 500. However, the potential rate increase could affect them since they tend to be more leveraged and interest pressure would increase.
On the other hand, Harris’s could continue to favor the magnificent seven given her link to Silicon Valley.
The author is Corporate Credit Team Leader of PPI (Personal Investment Portfolio)
