The 'Trump trade' versus the 'opportunity economy': How the race for Washington would shape markets and the economy

• Trump and Harris offer vastly different economic policies.
• Harris' campaign focuses on middle and lower-income support while Trump on cutting taxes.
• But both candidates will have to face the reality of mounting US debt.

Only a month ago, expectations of a second Trump administration were running high. More recently, the prediction betting market Predictit and a few national polling averages showed Vice President Kamala Harris in the lead. But it's still a tight race.

The uncertainty means big-money decisions are being put on hold, according to an August 18 note from Goldman Sachs. Financials, government contractors, and companies with exposure to the Inflation Reduction Act are halting capital expenditure until results are in, which could mean a temporary drag on growth, the note read.

It makes sense; both candidates are running on vastly different economic promises, and their policies could have ripple effects on the economy.

Former President Donald Trump's Republican bid is inclined toward tax cuts, especially for the wealthy. Meanwhile, Harris' Democratic bid leans toward taxing the wealthy.

Still, markets know what to expect under a second Trump term. Headlines around the Trump trade circled the web in July as he led the polls and dominated the first presidential debate. In the 24 hours around the event, investors piled into real estate, energy, and financials while rolling out of renewables, utilities, and discretionaries.

It makes sense, says David Barrett, the CEO of EBC Financial Group, who noted that Trump's previous policies positively impacted the oil and gas industry. The former president has been historically supportive of fossil fuel exploration while pushing back on environmental policies that limit the sector's ability to expand. Meanwhile, the ESG trade tends to suffer because it has benefited from subsidies under the Biden administration, he added.

On the other end, projecting policies under a Harris administration isn't as clear-cut. For one, she hasn't had a presidency in the past that could be used as a benchmark.

However, one thing is certain: both candidates are attempting to demonstrate who can be more generous in terms of promising expanded tax credits and even pledging not to tax tips, said Chris Brightman, CEO of Research Affiliates. The issue is, regardless of what promises are made during the campaign trail, whoever ends up in Washington must compromise with an inflexible Congress. And in reality, the US can't afford tax cuts because of the mounting fiscal deficit, he added.

"What you're hearing from the candidates is what they believe voters want to hear. And I don't necessarily think that that is going to be what drives the policy that affects markets," Brightman said.

Kent Smetters, the faculty director at the Penn Wharton Budget Model, seconds those deficit concerns, adding that neither candidate has touched on this issue. And until they do, it's equivalent to arguing about furniture while the house is burning down, he said.

Teeter tottering the economy

Spending sprees and the deficit will matter because markets must remain optimistic about the US economy to continue funding its debt.

Smetters has been tracking the candidates' talking points and projecting their likely policy choices onto economic models to determine whether they're sustainable. One of those findings was that an extension of the Trump administration's Tax Cuts and Jobs Act (TCJA) reduces government revenue by $4 trillion over 10 years and drives US debt 16% higher by 2054.

The bond market isn't optimistic about that. TD Securities head of US rates strategy, Gennadiy Goldberg, previously told Business Insider that a majority Republican House and Senate would lead to a $2.2 trillion deficit for fiscal 2026, compared to $1.7 trillion in 2023 and TD's projected $1.9 trillion in 2024. Meanwhile, a Democratic sweep could increase taxes on the wealthy and corporations to help pay it down. A split government would force both parties to negotiate to control the deficit.

Jayati Bharadwaj, global FX strategist at TD Securities, says she's beginning to get questions about how election outcomes could impact the forex market and the dollar. She expects a Trump presidency to bring in more tariffs and trade wars, similar to what we saw implemented in 2016. In short, it paves the way for a stronger dollar. On the other hand, a Harris administration would be more neutral for the dollar, causing currency markets to turn away from Washington and instead focus on economic indicators such as global growth and US rate cuts.

The Harris campaign

On Friday, Harris shared her campaign's economic policy goals during a speech in North Carolina. Dubbed the "opportunity economy," the initiatives are focused on financially supporting households, specifically those of middle and lower income.

Her notable promises included widening the earned income tax credit (EITC), which provides a tax reduction that could increase a refund for those earning below a certain amount. She also touched on a child tax credit that provides $6,000 in tax relief for the first year of a child's life, up from $2,000 under the current law.

It could be good news for one sector of the market. RBC expects that any expansion in the child tax credit could positively trickle into consumer discretionary spending.

Yet, Harris' promissory spending puts investors in a tight spot as they contemplate whether to lock in yields before rate cuts or brace for further debt that could flood the bond market. Alonso Munoz, the CIO of Hamilton Capital Partners, emphasized that someone will have to pay for all that, and it will likely be the bond market that must absorb it as debt. He's specifically concerned about the impact it would have on longer-duration bonds, especially the 10-year.

Smetter's model projects a $2.1 trillion loss in government revenue from Harris' proposed tax credits by 2034.

Harris also pledged support for first-time homebuyers in the form of $25,000 in down payment assistance. Pete Carroll, SVP of public policy and industry relations at CoreLogic, noted that housing policies have broader bi-partisan support in the US House and Senate. Yet, they'd need to be incorporated into a new tax bill that addresses elements of the 2017 Tax Cuts and Jobs Act, set to expire in 2025. The issue is that they may not be prioritized over the other tax policies of both parties.

Finally, Harris promised to rein in the increased cost of food and drugs. But Munoz's concern is that any attempts to regulate the free market would lead to margin compression and hurt consumer staples. RBC's note seconds that concern. This bank reinforced its underweight position in consumer staples, citing Harris' pledge. RBC also expects the expansion of the Medicare drug price negotiation program to affect the healthcare sector, reinforcing its market weight position.

Barrett noted that, in many ways, she's carrying on with the Biden agenda but with more ambition. This signals a harder push to reach influential middle-class voters in the five key swing states of Arizona, Georgia, Michigan, Pennsylvania, and Wisconsin.