Investors should care about the US election. Here’s why

The American comedian John Mulaney once likened Donald Trump’s presidency to a horse loose in a hospital: “I have no idea what’s going to happen next — no one knows what the horse is going to do, least of all the horse.”
This might just apply to both candidates this time around in a contest that is light on detail, strong on rhetoric and bitterly divided. It’s soap opera-worthy stuff, but how much should we care from an investment point of view?
The short answer is: we should probably care quite a lot. A cursory check of my self-invested personal pension (Sipp) shows that about one third is invested in America, more than in any other single country, and not a deliberate choice on my part. I’m guessing most investors are in the same boat, with a high weighting to the US, even if they don’t realise it.
The reason for this is that the US represents a sizeable chunk of global financial markets. The MSCI World index tracks the world’s largest companies by market capitalisation and the US makes up 72 per cent of that index. Every one of the largest ten listed companies in the world is based there.
The US is also still the largest economy. It is an important market for companies across the globe — for consumer goods, for semiconductor chips, for commodities and more. If it has some kind of meltdown, the impact is far-reaching, not just for US firms but for businesses everywhere.
The whole election situation looks febrile. The candidates are neck and neck. Voters are completely polarised, with each assuming the other one will be disaster: Trump as “anti-democratic” and Harris as “proto-communist”. There is no guarantee that the supporters of one will accept the result if the other wins. It feels as if the US is flirting with disaster.
It doesn’t help that the US stock market already has some vulnerabilities. It has become unusually concentrated in a handful of names. These technology giants that were previously labelled the Magnificent Seven (Apple, Amazon, Alphabet, Meta, Nvidia, Tesla and Microsoft) are impressive businesses, but now make up about a third of the S&P 500 index and there are signs that investors are tiring of them. There was a big wobble in the summer, and even Nvidia’s astonishing 122 per cent rise in profits failed to impress investors.
These stocks look expensive. The problems associated with social media are becoming increasingly evident, some of the tech giants haven’t been great about paying taxes, and there are some regulatory challenges. At the same time, the effects of AI could be huge, but could be as destructive as they are positive.
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The approach taken by each presidential candidate towards these businesses is going to be important. Richard de Lisle, the manager of the VT De Lisle America fund, says Harris’s distaste for big business may be a swing factor: “To put an investment spin on that, she may be more confrontational with the entrenched monopoly power of the Magnificent Seven. It is increasingly clear that social media needs to be confronted. She hasn’t said anything about unfettered AI, but I think we can assume from a regulatory point of view that she would be more responsible in not letting it run rampant.”
Trump may be more laissez-faire in his approach, but his Make America Great Again agenda would probably favour heartland stocks over the tech giants, says de Lisle. David Coombs, the manager of the Rathbone multi-asset portfolios, agrees: “[A Trump return] would be good for autos as higher tariffs would protect the industry from overseas competition, and bad for retailers where higher inflation and lower choice would reduce consumer confidence and spending.
“Construction could benefit if reshoring of factories intensifies — as would domestically manufactured goods if tariffs are applied unilaterally on all imports. Financials would benefit if regulations were eased further. Reductions in regulations also help smaller companies to compete and disrupt large incumbents across many sectors.”
None of that looks great for the Magnificent Seven. Many investors have done very nicely out of holding a cheap S&P 500 tracker for the US market. While it makes me nervous to suggest gently backing away from the technology giants, the environment might suit a more active approach — the Premier Miton US Opportunities fund, VT De Lisle America or Artemis US Smaller Companies will all have more exposure to the type of domestic stocks that could benefit under both election candidates.
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But should investors be paring back their holdings more substantially, rather than just moving the chess pieces? The US has been hugely popular for much of the past decade, but there are growing fragilities. While growth is high, and interest rates are falling, the debt is vast — about $35 trillion and counting, according to the US Treasury. Debt repayments were up to an astonishing 76 per cent of personal income tax revenue in June, according to the Heritage Foundation, a conservative think tank. If it were any other country, it would be in a Liz Truss-style spiral by now.
Neither candidate is minded to tackle the deficit. Trump wants the cash for tax cuts, and Harris for spending plans. However, Edmund Harriss, the chief investment officer at Guinness Global Investors, said that according to one budget model “Harris’s approach would raise the debt by $1-2 trillion while Trump’s would increase it by $5-6 trillion”.
He believes both sides should be constrained by the size of the deficit and the rising interest burden on public debt. However, it’s not clear they will be. The worry is if international bond investors start to lose heart with bond markets. That will push the cost of the debt higher. While the size and power of the US affords it special privileges, it is not immune.
David Roberts, co-portfolio manager of the Nedgroup Investments Global Strategic Bond fund, says: “With at least one presidential candidate threatening to upend established fiscal institutions, there is increasingly an argument to avoid the US bond market.”
The other big risk is a revival in inflation. Both sides are pretty keen on tariffs, Trump more so than Harris. He is promising tariffs of 10 per cent on all imports and as high as 60 per cent for unfriendly nations such as China. That’s likely to be inflationary. If inflation rises, interest rates could go back up, and debt costs could spiral. In short, it would be a big ol’ mess. This may caution against a high exposure to the US in the near-term.
There are also considerations for investments outside the US. Coombs said that a comment from Trump about not supporting Taiwan in its dispute with China knocked the share price of Taiwan Semiconductor Manufacturing Company by 8 per cent in a day. “Like him or not, Donald Trump moves markets and creates volatility.”
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Coombs has been increasing exposure to European defence companies on the assumption that Trump will force European politicians to stop relying on the US in their defence policy.
Finally, there is the wild card element, or the “horse loose in a hospital” factor. Trump’s wilder promises include removing the independence of the central bank, sacking the head of the financial regulator and maintaining debt/GDP above 125 per cent. None of this would be good for economic stability.
While investors have grown accustomed to these pronouncements, and have learnt to look at what Trump does rather than what he says, they still have the power to create volatility. Harriss says: “Shorter-term, politics can spook markets, making any specific economy worth avoiding. In the UK, Truss’s unfunded budget showed that was true of G7 economies. The same thing could apply to the US.”
Some caution is warranted, whichever horse is roaming the operating theatre.
Ian Cowie is away