American comedian John Mulaney once compared Donald Trump’s presidency to a horse running free in a hospital, remarking, “I have no idea what’s going to happen next — no one knows what the horse is going to do, least of all the horse.” This description may also apply to both candidates in the current political climate, which is characterized by minimal detail, strong rhetoric, and deep division. The question remains: how important is this election for investors?

In short, it’s crucial. A review of my self-invested personal pension (Sipp) reveals that approximately one third is allocated to US investments, which is more than any other country — a situation many other investors likely find themselves in without realizing it.

The primary reason for this is the significant role the US plays in global financial markets. The MSCI World index, which tracks the largest companies by market capitalization worldwide, has the US accounting for 72 percent of its total. Notably, all of the world’s top ten companies are based in the US.

Moreover, the United States continues to lead as the largest economy and is a vital market for international businesses across various sectors, including consumer goods and technology. A downturn in the US economy would not only affect American companies but also have wide-ranging repercussions globally.

The current election cycle adds to the uncertainty, with candidates polling closely. The electorate is polarized, with each group fearing the others: Trump is viewed as “anti-democratic,” while Harris is labeled as “proto-communist.” There’s no assurance that supporters will accept the outcome of the election, heightening the sense of impending crisis.

The US stock market already shows signs of fragility, with a remarkable concentration in a few major tech firms, often referred to as the Magnificent Seven (Apple, Amazon, Alphabet, Meta, Nvidia, Tesla, and Microsoft). These companies, despite their impressive performance, now represent around one third of the S&P 500 index, and concerns are growing among investors. There was significant market volatility earlier this summer, and even Nvidia’s remarkable 122 percent profit increase did not impress investors.

Many of these tech stocks appear costly amidst emerging issues related to social media, tax compliance, and regulatory challenges. While the transformative potential of artificial intelligence could lead to significant advancements, it also poses risks.

The policies of each presidential candidate regarding these companies will likely be influential. Richard de Lisle, the manager of the VT De Lisle America fund, noted that Harris’s critical stance on large corporations could affect investment strategies. “She may take a more confrontational approach towards the monopoly power of these companies,” he observed. Given the current climate around social media, regulatory interventions are becoming more necessary, and Harris might take a responsible approach to AI regulation.

In contrast, Trump’s stance might favor traditional industries over tech. David Coombs, manager of Rathbone multi-asset portfolios, highlighted that a Trump victory could benefit the automotive sector through tariff protections while potentially harming retailers due to inflation and reduced competition.

“The construction sector might thrive if manufacturing jobs are reshored, and financial stocks could gain from reduced regulations,” Coombs explained. However, this scenario does not bode well for the tech giants.

Investors have generally profited from holding S&P 500 index trackers for US exposure, yet it may be prudent to reconsider focusing on tech. More active management strategies through funds like Premier Miton US Opportunities may provide better opportunities by emphasizing domestic stocks poised to benefit regardless of the election outcome.

Should investors consider significantly reducing their US holdings? While the US has been a favorable market over the past decade, vulnerabilities are emerging. The national debt now exceeds $35 trillion, with debt repayments consuming a staggering 76 percent of personal income tax revenue as of June, according to conservative think tanks. Other countries facing similar debt levels would likely be in crisis.

Neither Biden nor Trump appears inclined to confront the deficit. Trump advocates for tax cut funding, while Harris pushes for increased spending. Edmund Harriss, chief investment officer at Guinness Global Investors, indicated that various projections suggest Harris’s plans could add $1-2 trillion to the debt, while Trump’s could escalate it by $5-6 trillion.

Harriss believes that both candidates should be cautious of the escalating deficit and climbing interest costs associated with public debt. However, it remains uncertain if either candidate will heed this warning. Concerns might arise among international bond investors, potentially inflating borrowing costs. The US, despite its geopolitical weight, cannot afford to presume immunity from market reactions.

As David Roberts, co-portfolio manager of the Nedgroup Investments Global Strategic Bond fund, put it, “At least one presidential candidate has threatened to disrupt established fiscal norms, creating valid reservations about the US bond market.”

Another major risk stems from the possibility of inflation resurgence. Both candidates seem inclined toward tariffs, particularly Trump, who proposes import tariffs of 10 percent and as much as 60 percent on adversarial nations like China. Such measures could drive inflation higher, potentially escalating interest rates and borrowing costs.

This volatile scenario could warrant caution concerning US investments moving forward.

Additionally, global investments cannot be overlooked. Coombs noted how Trump’s comments on Taiwan affected the share price of Taiwan Semiconductor Manufacturing Company, which fell by 8 percent in one day. “Whether one supports him or not, Donald Trump influences market movements and contributes to volatility,” he commented.

Coombs has also increased his focus on European defense firms, as he anticipates Trump’s influence may push European leaders to operate independently regarding defense strategies.

Ultimately, the unpredictable nature of the election holds significant implications. Trump’s more extreme proposals, such as altering the central bank’s independence and undermining regulatory bodies, threaten economic stability.

While investors have become accustomed to his rhetoric and learned to prioritize actions over words, these statements still bear the potential to create market disruption. Harriss cautions, “In the short term, political developments can unsettle markets, prompting investors to steer clear of specific economies. The UK’s recent experiences under Truss demonstrated this phenomenon in G7 economies, and the same risks could manifest in the US.”

Given the unpredictability of the election outcome, caution remains a sensible approach for investors observing the figurative horse running through the operating room.

Ian Cowie is currently unavailable