The economy can have a big effect on markets, and is one of the key areas where policy can impact investments. Both candidates are promising government stimulus that could benefit sectors such as construction and aerospace & defence, though there may be some disappointment in the scale and speed of government action.


The importance of fiscal policy

Fiscal policy is one of the major tools that governments use to influence a country’s economy.  It defines the level and allocation of government spending and taxes, with new initiatives sometimes implemented through ‘fiscal stimulus’ programmes, such as infrastructure spending, or supportive tax policy - for example, tax relief for particular groups. 

Typically US elections have implications for fiscal policy since candidates usually want to reward different interest groups, or have different views about spending and taxes in the medium term. These decisions can make a difference to how much money there is in the economy, and by extension corporate expenditure, employment, consumer spending. It can also shift the focus of the economy into different sectors, encouraging investment and expansion in some areas while limiting it in others.

For these reasons, investors will be studying the two candidates’ policies carefully to see where the opportunities might lie should one or the other gain the White House. 

Fiscal stimulus

In many developed economies there is a growing sense that interest rates are very low and monetary policy is reaching its limits. The two main presidential candidates have stated that they would instead try to encourage economic growth through fiscal policy.

While the size and timing of any fiscal package would depend on the state of the economy, both candidates favour higher infrastructure spending:

  • Mrs Clinton has mentioned a $250bn infrastructure plan and the creation of an infrastructure bank to build or modernize ports, airports, roads, waterways, electrical grids and broadband access. She also intends to bring back Build America Bonds and to expand the Affordable Care Act ( ’Obamacare’)
  • Mr Trump favours a larger infrastructure spending programme and would raise defence spending substantially, but has not provided much detail. He also intends to shut down the Affordable Care Act and reform or scale down some federal agencies.

Under either candidate the construction sector should benefit from increasing fiscal spending. Likewise, aerospace & defence should do well, since much of its revenue comes from government contracts.

But as we said in our first Insights article on the elections, it is unlikely that one candidate will win both chambers of Congress and be in a strong position to implement their full programme. The most likely outcome may be an infrastructure spending drive along with corporate tax reform, since both have been on the US political agenda for some time. Investors hoping for a big fiscal stimulus initiative may be disappointed by the scale and speed of government action. 


Tax policy

Tax policy is the other side of fiscal policy as it can provide tax relief to individuals or businesses, or provide funding for spending programmes through higher taxes.

  • Mrs Clinton favours raising taxes and capping deductions for high-income households, while providing more tax credits for low-income households. She also wants to raise additional revenue by raising a tax on corporate profits earned abroad and not repatriated to the USA (an area that has been much in focus recently due to many US companies holding large amounts of cash offshore).
  • Mr Trump is proposing an overhaul of US tax policy by reducing the number of tax brackets to three from the current seven, and by lowering the upper tax rate. He also plans to eliminate various other taxes. On the corporate side he has proposed a one-time profits repatriation holiday at a discounted rate, as well as a lower corporate tax rate on worldwide profits.

So, both candidates want to address the question of offshore corporate cash, probably to raise tax revenues for government spending plans. Some international corporate tax reform is likely, though the impact would probably be larger under a Clinton presidency.

For investors, fiscal policy changes may have implications for the dollar and for interest rates. Mr Trump’s proposals would reduce tax revenues, resulting in a larger US budget deficit and a higher debt to GDP ratio. This will lead to more US treasury issuance and potentially higher interest rates. The dollar might strengthen a little if Mrs Clinton implements a fiscal repatriation policy that leads to an inflow of foreign-held profits back into the dollar.

The sister strategy to fiscal policy is monetary policy, managed largely by the US Federal Reserve. We’ll be looking at this area in detail in a future US Election Insights.

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