US Election:
Key policy issues and how they matter to traders

What’s at stake in this election?

Election campaigns normally focus on a few key issues, where clear differences exist between the two candidates. The 2024 US presidential election is no exception. So far, there are major policy differences on environmental and industrial policy, while both parties are roughly in agreement on defence policy.

Even where the two parties are closely aligned, different policy areas could have a greater or lesser focus depending on which candidate wins. For example, a Trump victory is likely to result in a greater focus on border security, while Harris, whose policy differences from her predecessor, Joe Biden, are not yet clear, has different priorities. Some of the most important differences are over environment and industrial policy, with companies working in fossil fuels or clean energy likely to benefit from the Republican or Democrat win, respectively. Another potential flashpoint is over the federal minimum wage, with potential impacts on major retailers.

“The underlying strengths and weaknesses of the US economy do not change with the president”

Policy and traders

The choice of US president impacts global markets, and their policies or policy preferences are important in shaping the fortunes of individual stocks and stock sectors. The underlying strengths and weaknesses of the US economy do not change with the president, and individual stocks or sectors are more likely to experience political volatility than the overall market.

Normally, these most-impacted stocks are in industries where the two candidates have significant policy differences, and where the US government is a major player. For example, the defence sector, whose largest companies rely extensively on US government contracts, is influenced by debates on foreign policy. Other sectors experiencing political risk in the 2024 US presidential election are energy, retail and manufacturing.

Defence

The US government spends as much as $850 billion annually on defence, with almost 50% going to private contractors. These contracts are enormous, and the stocks of major defence contractors like Lockheed Martin are keenly sensitive to debates on foreign policy. Increases in military spending are a bipartisan issue in the US, with both parties in broad agreement on the need to fund a major military presence in Asia, the Middle East, and Europe.

The next US presidential election looks set to continue this pattern. Although a subset of the Republican Party is against American military activity in Eastern Europe, this same faction supports growing its presence in the Middle East, making the net impact on defence stocks minimal.

Energy

One area of significant policy disagreement is climate change and the energy sector. Former President Donald Trump has repeated his commitment to all forms of energy, while the Democrats support investment in new, clean energy sources. Republican discussion of climate and energy policy focuses on reducing pollution rather than carbon emissions, and Trump has indicated he would withdraw from key climate targets, citing their differential impact on Chinese versus American industry.

The energy sector involves some companies who are diversified across renewable energy and fossil fuels, but most are specialised in one or the other. It is possible fossil fuel stocks will perform better if Trump is elected, whilst companies involved in solar power may perform better if Harris wins.

Manufacturing and retail: tariffs

In 2016, Trump’s campaign was marked by a clear departure from the previous bipartisan consensus on free trade, instead arguing for tariffs against Chinese industrial goods. This has since become, to varying degrees, a standard position for the Democratic and Republican parties. However, there are still differences in the commitment to tariffs and industrial protectionism, and they do not fall neatly across party lines. Both the Democrats and Republicans have pro and anti free trade factions, with Biden and Harris representing the pro free trade camp while Trump is very much on the protectionist wing of the Republican Party.

Manufacturing and retail: minimum wage

Kamala Harris has stated increasing the federal minimum wage is one of her top priorities. Though many states have set higher minimum wages than the $7.25 federal minimum, the base level has not changed in 15 years. Harris has made public commitments to raise the minimum wage and to stop charging income tax on tips. Trump has indicated he may support the second of those measures, but he has argued against raising the minimum wage in 2020 on the grounds that it could hurt small business owners.

Increases in the minimum wage will have mixed effects on the US economy; they could improve the spending power of Americans, potentially increasing GDP, but will also increase salary costs for employers. This may harm the profitability of large businesses with lots of poorly paid staff, such as Amazon or Walmart.

Conclusion: which assets will be impacted?

The most important impacts of 2024 policy debates will be on individual stocks, and sectors such as energy. Commodity prices tend to be driven by underlying factors of supply and demand rather than sentiment (except for gold), so they are unlikely to see big price swings. This is true even when they are relevant to policy debates about energy and climate.

When trading stocks or stocks CFDs, traders should pay attention to the sector and markets the company operates in. US energy companies, for example, may face extra volatility as the election approaches.

The impact of policies like raising the minimum wage are harder to estimate, because large corporates such as Walmart are influenced by a very broad range of factors. Major retail and distribution companies are closely tied to the overall economic performance of the US, and this will complicate the specific risk of any one policy debate.

To trade political risk, you need to find an asset with as few complicating factors as possible; for example, solar energy businesses will face a more concentrated political risk than a diversified energy provider. Navigating these differences requires a detailed understanding of the asset in question, as well as live policy debates affecting it.

As always, it is essential to remember that it is impossible to predict market behaviour. All CFD traders should have an appropriate risk management strategy in place when trading around the US election.