Divided government is most likely outcome from election year, J.P. Morgan expert says

The presidential race has had more twists and turns than a spy novel over the past month. With fewer than 100 days left before the November election, which party will control the White House and Congress remains anyone’s guess.

“It is very close,” said David Kelly, Ph.D., chief global strategist for J.P. Morgan Asset Management. “We have to think about five possible outcomes – divided government, a narrow Democratic sweep, a narrow Republican sweep, a landslide Democratic sweep or a landslide Republican sweep. Of those, I would say divided government is the most likely outcome.”

Kelly discussed the potential implications of the election in an August 1 webinar sponsored by J.P. Morgan.

“What we know is that the race between former President Trump and Vice President Harris is very close,” he said. “On the Senate side, it looks like Republicans have a slight edge. The most Democrats can reasonably hope for is 50 seats, and it’s going to be tough for them to get that 50^th seat. Democrats may have a slight edge on the House side. Republicans have a very narrow majority, and you wouldn’t need much of a swing for Democrats to take over. But it’s very close, and the mostly likely outcome is that you don’t get all three going to one party.”

Kelly shared his insights on how potential outcomes could affect several key areas of interest for investors.

Taxes. “The administration really needs to convince Congress, so you either need a sweep or to convince people from the other party,” he said. “If you get a Republican sweep, I think the Tax Cut and Jobs Act of 2017 will be fully extended beyond the end of 2025. If you get a Democratic sweep, the top tax rate might go from 37% back up to 39.6%, and the estate tax might return close to the previous track in terms of exemptions.”

National debt. “I do think this rising government debt under any configuration is very important,” Kelly said. “I don’t think it’s going to cause a short-term crisis, but we are looking at $2 trillion deficits for as far as the eye can see. If the Treasury Department has to borrow an extra $2 trillion every year, it’s going to have to pay up in terms of interest rates.”

Trade and tariffs. “The president has a lot of authority over trade and tariffs, because over the years, Congress has ceded authority to the president,” he said. “There is a difference. Former President Trump obviously introduced higher tariffs when he was president. As an economist, I can’t say I believe in tariffs. Tariffs are extraordinary in both their ability to slow the economy and push up inflation.”

Regulation. “One thing that has happened over the years is that the Republican party has become much more populist,” Kelly said. “It used to be seen as being very pro-business in general. Now they are not necessarily pro-big business. Both parties have an interest in anti-trust and preventing monopolies from becoming too big or powerful. People perceive the Republican party to have a lighter touch.”

Health care. “There is going to be a lot of spending on health care moving forward, whoever wins,” he said. “It’s going to be important to find the drugs and therapies that actually improve people’s health, because there will be a lot of money going into it.”

U.S. dollar. “The U.S. dollar has been overvalued for many, many years,” Kelly said. “You should try to maneuver the dollar to a place where it actually provides you some benefit. Bringing the dollar down is not a bad idea. We have heard President Trump and his running mate talk about a lower dollar as a possible outcome.”

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Although it is important to pay attention to such things as party platforms and campaign promises, keep in mind that policies with the potential to affect investors rarely go according to script.

“You don’t want to make huge bets based on politics, because you don’t know how the political races are going to transpire,” he said. “A lot of things can happen after July in an election cycle. And even if you think you really have the policies down, remember that what defines a presidency is not the policies that a party proposes before an election but what happens then. Events that occur, like the pandemic, the great financial crisis or 9/11, can really change how an administration will have to react. And that’s all unknown.”