What the US election could mean for investors

The US presidential elections are a ballot box juggernaut, the likes of which we simply don't see in Australia. 

Reuters recently reported that Vice President Kamala Harris's presidential campaign alone has raised $US1 billion since she became the Democratic candidate in July. 

It makes our elections look very low key. The Grattan Institute reports that Australia's political parties collectively spent just $418 million in the year leading up to the 2022 federal election. 

The crazy thing is that the bulk of money raised as part of the US election goes towards influencing voters in just a handful of swing states. The rest tend to be rusted on Democrat or Republican supporters. 

Here in Australia, we can only watch on as Americans head towards the polls on 5 November.   

Even so, it's worth taking an interest because the outcome has the potential to impact investment markets globally. 

What's happened in the past? 

In the three decades since 1994, the US has held seven presidential elections. Four have been won by Democrats though three elections were won by the incumbent president, so the baton of power didn't change hands. 

The table below looks at how share markets in the US, Australia and globally have performed in previous election years.  

Clearly, the results are mixed. As a side note, Obama came to the presidency in the midst of the global financial meltdown, which explains the notably poor equity market returns of 2008.  

Share market returns in past election years 

Source for returns: Vanguard 

For me, the biggest takeout from the results shown in the table is the value of diversifying your share portfolio. Neither international, US nor Australian shares have dominated the league table of returns in every election year.  

How have shares performed under red or blue administrations? 

The American political landscape is complicated - just look at the electoral college voting system! And in terms of equity market gains, there's not much in it between Democrat and Republican administrations. 

As the graph below illustrates, US shares have recorded higher average annual returns when Congress has been divided and one party controls the House (or Senate), and the other party holds a majority in the second chamber.  

Overall, though, US stocks have historically delivered positive returns under a variety of governments. 

How US shares have fared under different government conditions 

Source: YCharts 

What about Australian shares? 

In today's highly interconnected global economy, the 2024 US election results have the potential to impact Aussie investors.  

If the Democrats win, it is likely to be business as usual.  

Trump, on the other hand, has pledged to raise tariffs on imports. This has some downside potential.  

In 2023, Australia exported $33 billion worth of goods to the US. But China is a far bigger trading partner (our number one in fact), spending over six times this amount - a total of $218 billion, on Australian goods and services last year.  

I'm no economist, but Trump has said he will slap a 60% tariff on US imports from China, and it's not hard to see how this may do little to help China's already sluggish economy.  

It could impact our economy too. As I noted, China is our main trading partner, and an OECD report suggests a 10% reduction of trade between the OECD and the major non-OECD countries (which includes China and India) could see Australia's GDP fall by 1.2% mainly because 77% of our mining products and over one-third of our metals are exported to China.  

What to weigh up 

Of course, all this is speculation. What I can say with certainty is that a whole variety of events impact Australian and global investment markets - not just the person occupying the top job at the White House. 

Sure, elections may create some short-term uncertainty, though this hasn't hurt Aussie shares so far, which have delivered total returns topping 20% over the past year. 

So I come back to my long-term mantra, which is to focus on what you can control - the make-up of your investment portfolio. And diversification is the best defence an investor can have.  

With a long-term view, I am confident that share market indices will move up. In a changing world I am less confident of pinning my hopes on individual stocks.  

Diversification is the key 

Regardless of the US election outcome, technology and demographic change is driving opportunities. To participate in these opportunities, and protect your portfolio from threats, it makes sense to diversify across countries, sectors and individual stocks.  

What is so good about the world we live in is that achieving this diversification is easy.  

Several decades ago, our investment options were basically limited to a bank account or property. Shares were for the rich, and offshore investment was all too hard.  

Today we can invest anywhere in the world - and gain instant diversification - even when we have limited capital. And it's largely thanks to exchange-traded funds (ETFs).  

The verdict 

As I write, it's clear the US election is a close race. Too close to call.  

In times of uncertainty, it's worth remembering that quality shares have done well for centuries, and setting a savings and investment discipline will help you stay on track with your goals regardless of news headlines.  

Add diversity to your portfolio and you're well-placed to weather any storms that may be fuelled by global events beyond our control, including whichever candidate wins the right to live in the White House for the next four years.  

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