It’s almost over! Unfortunately, those texts might not stop
right away. Unless this election is an unexpected blowout, some
key states won’t have full counts of all their ballots for several
days. That said, enough results from some hotly contested states
like Pennsylvania should be in so by the wee hours of
Wednesday morning we should have a good idea of who will be
inaugurated next January. This will be true even if there has not
been a concession speech by the other candidate yet (or ever!).
We should also have a good idea by then which party will
control the Senate for at least the next two years. However, given
the number of tight House races, the possibility of recounts, and
how closely divided the House is already, it may take a week or
more to sort out control of that chamber of Congress.

For investors, it’s important to remember that the outcome
itself (and whether it suits your beliefs or not) is no reason to act
emotionally. That’s how investing mistakes are made. If you
don’t like the outcome of this election, you will probably like the
outcome of the mid-term elections in 2026 much better;
whichever party loses the race for the presidency this year will
likely win the House in two years, putting a major brake on the
new president’s legislative agenda.

Moreover, polls suggest neither party will obtain a super-
majority. In other words, as the Founders intended, there will be
compromise. So, for the economy, what does that look like?

Republican Sweep: Look for a temporary extension of the
tax cuts originally enacted in 2017, but with a lower tax rate on
corporate profits and some modest targeted tax relief for workers
who earn tips. Because of budget rules, the only way to
permanently extend the tax cuts is to make major cuts to
spending and the bureaucracy. While it seems clear that massive
government growth in the past two decades should be reversed,
it remains to be seen whether Republicans are serious about it.
So, we expect a reduction in green energy subsidies and a focus
on reforming Medicaid. Without legislation, President Trump
would also raise tariffs, particularly on China and substantially
reduce net immigration flows into the US.

Harris/GOP Senate/Dem House: In spite of Harris’s
campaign positions, don’t be surprised if a President Harris ends
up temporarily extending the 2017 tax cuts, except at the very
top. The same thing happened in late 2012 under President
Obama, who wanted to rescind the Bush tax cuts. But he cut a
deal with the GOP to permanently extend those tax cuts, except
at the very top. Why? If he hadn’t, tax rates would have gone
up for everyone. We think Harris cuts a similar deal to avoid
taxpayer pain in 2026. However, we don’t see her reforming any
entitlements or cutting discretionary spending, which means
even larger budget deficits for the next four years. This is the
scenario that the bond market should be most concerned about.

Trump/GOP Senate/Dem House: Look for a temporary
extension of the 2017 tax cuts but only after the GOP shows a
willingness to negotiate and make concessions, including letting
the top tax rate go back up to 39.6% and raising the limit on the
state and local tax deduction, now capped at $10,000, to $20-
25,000, instead. That’d be the political price to get some
Democratic House members to vote for an extension. Trump
would raise tariffs and reduce net immigration flows, no
congressional action required. In addition, in this scenario
Trump would try to resurrect the presidential power of
“impoundment,” (a power to cut discretionary spending without
congressional approval) which hasn’t been used since the early
1970s, claiming the law passed in 1974 under Nixon to eliminate
impoundment is ineffective, because it can only be eliminated by
a Constitutional Amendment, not a regular law.

Democratic Sweep: Taxes would go up. The top rate
would go back to 39.6%, the corporate rate to 28% (from 21%),
and the long-term capital gains and dividends rates to 24% (from
20%). Meanwhile, estate tax deductions could fall and
Democrats would try to pass a corporate carbon tax.
Immigration flows would continue, deficits would not decline,
and the US would likely get more involved with Ukraine.

As we all watch the returns tomorrow keep in mind that the
current US constitutional system has survived 235 years. This is
not going to be the last election and if the American people don’t
like the policies they get, more changes will be made in the years
ahead. This is particularly true regarding the federal budget; the
last two budgets have had unprecedented deficits considering we
are not at war and unemployment is low. This issue must be
addressed in the years ahead.