Students of stock market history have produced reams of analysis that US elections rarely have a lasting impact on the US economy or US markets. In fact if there is any discernible pattern then markets do better under Democrat Presidents. This is despite the perception that the Republicans are the party of big business, low regulation and lower taxes. The reality is that there are too many variables in a normal election cycle to make a rule of thumb and this is definitely not a normal election cycle.
Despite the uncertainty and fallibility of polls it is increasingly likely that Biden will be the 46th President of the United States. His lead in the national polls has been solid and consistent indicating fewer undecided voters unlike 2016. More importantly in the key battleground states (Florida, Pennsylvania, North Carolina, Michigan) that could tilt the electoral college either way Biden is also showing consistent leads, albeit much narrower than the national polls.
There is also another election going on, arguably just as important. All the seats in the (lower) House of Representatives (HR) and 35 out of the 100 seats in the Senate (upper house) are up for re-election. At the moment the Democrats are expected to retain the HR and eat into the Republican’s 3 seat majority in the Senate. If the Democrats carry the Senate as well as the White House “a clean sweep” then they will have the ability to drive through their legislative programme unhindered.
Due to the large number of postal and early votes cast so far (66.4m as of Monday) we could see a very high turnout and yet no clear winner on the night as these votes are counted after the polls close. The scope for legal challenge (and counter challenge) is high. This alone could cause market volatility in the short term.
What does this mean for markets? Hard to say as both parties are thin on policy detail. In fact Trump’s campaign website lists no formal policy items at all!
The consensus thinking is that any clear result with a President constrained by a divided Senate and House of Representatives would probably be viewed with relief by the markets. This will result in policy moderation with a backdrop of continued low interest rates and continued fiscal (government) spending.
A Democrat clean sweep is a more interesting outcome. The consensus view is that this would be unfavourable for US assets. Biden would roll back some, but not all of the Trump tax cuts which would be negative for US corporate profits but on the other hand we will get a much larger fiscal stimulus which is supportive of the economy. There will be a different set of winners (and losers) – some of the large cap tech companies (Facebook, Apple, Amazon Alphabet, Google) which have led the US indices higher will come under greater and more determined regulatory scrutiny. Green technologies, healthcare, industrials and the domestic economy (usually captured by smaller companies) will be boosted. As global investors we also consider the impact on other markets and in most scenarios a Biden presidency is probably neutral to positive for non US equity markets whilst Trump’s aggressive and scattergun trade policies would be negative.
US assets (equities, bond markets and currency) have been remarkably sanguine in the run up to the election implying that a Biden victory (but not a clean sweep) is in the price. Trying to trade ahead of events like this is a lottery (remember the sharp fall on Trump’s victory followed by a sharper rebound). Most of our client’s exposure to US equities is through index trackers. If there are any significant regime shifts they will be multiyear events and we will have time to reposition the portfolios with the benefit of greater clarity.
The only prediction that we will make is that should he lose Trump will not concede gracefully.