How the US election result could impact your global stock portfolio

Amid considerable hand-wringing about the upcoming US Presidential election, systematic global asset manager Dimensional says investors should simply stay the course.

Dimensional Fund Advisors’ research found no reliable signals for markets from election outcomes. Picture: Getty Images

The US election is less than four weeks away – and if Donald Trump wins, his tariff plans could spark a trade war that may hit the global economy – but systematic fund manager Dimensional Fund Advisors says the election is just one of many inputs that can impact stocks and bonds.

After looking back at US election outcomes over the last century, as well as the impact of elections in other countries, the fund manager found no reliable signal from election outcomes.

Markets went up over the long term regardless of who was occupying the White House.

“There’s no doubt that the US elections will have a dramatic impact on macroeconomic policies,” Dimensional investment strategist Warwick Schneller says.

“But from a long-term perspective, regardless of whether it was Republican or Democrat-controlled and regardless of the macroeconomic environment and the policies enacted, stockmarkets performed well.”

Of course, Trump may not enact all his tariff plans and they could come with exemptions.

The S&P 500 hit a record high of 5796.8 points this week, up about 21 per cent for the year to date on tech sector gains, a resilient economy, lower inflation and the start of interest rate cuts.

Australia’s ASX 200 index hit a record high of 8285.7 last month and was up about 8 per cent for the year to date, despite weak economic growth and a hawkish stance from the Reserve Bank.

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But there are concerns that tariffs of 50 to 60 per cent on China and 10 per cent on the rest of the world could hit global economic growth even if they would help the US in some ways.

According to some accounts, the global economic impact would be worse than the Hawley-Smoot tariffs that were introduced in 1930 and contributed to the Great Depression.

If that’s the case, a Trump victory could be a significant tail risk for markets, notwithstanding his plans to extend the corporate tax cuts that are due to expire at the end of 2025.

But Dimensional’s research didn’t find many extreme movements during election months or any consistent signal from a so-called Red Sweep or Blue Sweep of Congress.

“Again, unfortunately, you don’t observe a signal which is going to be useful for an investor,” Schneller says. “So the way we generally think about these situations, the best course of action is stay disciplined from an investment perspective and stay focused on the long-term plan.”

Vice President Kamala Harris speaks at a campaign rally in Arizona. Picture: Getty Images

With elections in 76 countries affecting 4.4 billion people this year, and volatility sparked by the vote in France, Dimensional also found a lack of useful signals in other markets.

“If you look at Australian markets, whether it’s Labor or Liberal (governments) you see similar results,” Schneller says. In 50 years of Australian stockmarket returns over 19 federal elections he found no clear pattern of returns based on which party won.

“Governments are incredibly important – they’re often the biggest spenders and can have a huge impact on the labour market,” Schneller says.

“But they’re just one of those inputs that investors use to think about what’s going to be influencing the market, an important one … maintaining long-term focus is the right course of action.”

In a similar vein, Plato Alpha Fund head of long-short strategies David Allen warns of “crystal ball observations” about the US election that can be “seductive but often miss the mark”.

He recalls concerns that Trump’s tariff policies in 2017 would tank iPhone sales. Those who heeded this advice missed out on Apple’s 160 per cent return over the following year.

Similarly, fears of Biden destroying the oil and gas industry proved unfounded.

Allen analysed correlations between global betting markets and the 10,000 biggest stocks in developed markets for an unbiased gauge of how they could react to a Trump or Harris win.

Former US President Donald Trump addresses the Detroit Economic Club in Detroit, Michigan. Picture: AFP

Kamala Harris is currently slightly ahead in the polls.

Allen has a list of stocks to avoid for outsized losses if Trump wins and Harris is defeated.

Interestingly that list includes three Australian companies – De Grey Mining, Mineral Resources and St Barbara – suggesting that the stockmarket sees some negative implications for gold and lithium if Trump wins.

“A Trump presidency, characterised by deregulation and tax cuts, could spur economic growth, creating a headwind for gold, traditionally a safe-haven asset. It’s also no surprise to see renewable energy companies on the list, given Trump’s opposition to green energy,” Allen says.

His other list has stocks likely to surge if Trump wins. That list is dominated by semiconductor makers like Nvidia, oil and gas contractors like Halliburton, and a couple of regional banks.

“US deep-cyclical energy companies and regional banks are likely to thrive under a Trump presidency, benefiting from reduced regulation and lower interest rates,” Allen says.

The inclusion of several semiconductor companies might be surprising, given Trump’s mixed stance on Taiwan and potential trade restrictions. But these companies have a high “beta”, meaning they tend to outperform the market when it rises.

“If Trump’s policies boost market sentiment, semiconductor stocks could see substantial gains assuming he refrains from punitive trade restrictions,” Allen says.

The above lists can also be applied conversely in the result of a Harris win, but Plato’s analysis has shown some variance.

Overall, Allen says that trying to trade elections is a futile undertaking, but for active investors focused on alpha generation and capital preservation, elections can’t be ignored. “Rather than spending endless hours trying to anticipate inherently unpredictable events, we feel the most prudent approach is to ensure your portfolio will not be significantly impacted, whoever wins on November 5 – it’s about protecting, not predicting,” he added.