An election can be lost in the televised debates and unfavourable media coverage during the course of a campaign. However, this is not a normal year and not a normal campaign.
Politically and socially, the US is in distress and president Donald Trump’s approval ratings are at a low point due to his handling of Covid-19 and nationwide protests over the killing of George Floyd.
Estimated electoral college votes
Source: The Economist
As of 1 July, data from The Economist predicts the likelihood of a Biden victory at 89 per cent, winning 343 electoral college votes, more than the 270 needed to take the presidency.
However, it’s likely that markets and businesses would prefer a victory for pro-business incumbent than his Democrat rival Joe Biden.
The issue of the US-China trade war also looms, while the possibility of rising infections in the winter months could cause further uncertainty.
Below, Trustnet talks to five market experts on their views and where this election may be won and lost.
Jason Hollands, Tilney Investment Management Services
While the election is important, said Jason Hollands, managing directorof Tilney Investment Management Services, the fiscal stimulus packages in the US show that its deeply divided politics can come together, offering hope for more cohesive relationships in the future.
“The US Congress has repeatedly managed to reach bipartisan agreements on fiscal stimulus measures and notably, at greater speed than the EU has,” he said. “The Fed have been swift in responding to the crisis through an unlimited commitment to purchase assets and supply copious amounts of liquidity.”
Trump’s poll ratings leave little to be desired, but the trade tensions with China offer a chance to show strength in the face of growing expansionary policies.
“This will motivate the Republican base that the administration will make good on the balance of trade and repatriating American manufacturing jobs, as well as national security concerns,” he explained.
The Tilney managing director is clear that this isn’t solely about China, the US Treasury has opened a one-month comment period on proposed $3bn of tariffs on EU imports.
“Technically this is a World Trade Organization-permissible response to illegal Airbus subsidies by the EU,” he said. “But the timing coincides with the US also considering aluminium tariffs on Canada and the EU deciding to ban US visitors.”
However, these actions have caused increasing concern about global trade uncertainties.
“There are of course big policy differences over things like policing reform and healthcare, but a lot of Democrats are also hawkish on China and both parties have advocated major infrastructure spending,” Hollands said.
“Despite misgivings around Trump, the markets would probably marginally prefer a Republican win, as the Republicans are in favour of tax cuts and are less aggressive in their attention to drug pricing controls.”
Simon King, Vermeer Partners
“Despite what we might like to think, the US election definitely does matter,” said Vermeer Partners chief investment officer Simon King.
King noted that amid a burgeoning global recovery, a presidential election in one of the key players is instrumental in leading that recovery.
“Given that the US is likely to deteriorate in the coming months as its hit by a potential second and third wave of Covid-19,” he said. “The Trump administration turns its attentions to try and win the election, whoever wins that election will probably face an even worse starting position.”
While Biden is a favourite in betting markets, Trump’s original election and Brexit show how woefully inaccurate predictions can be.
“Biden represents a somewhat underwhelming candidate to many in the US,” said King.
“We would expect the rhetoric on trade wars to be toned down and while he may not return to the days of Obama’s laissez-faire attitude to trade deals, he will not be as combative.”
Trade wars with the EU and China will likely feature prominently in debates over the next few months, and China will favour another term of Trump over Biden, who has voiced concerns over Chinese more recently.
King said Biden may have to make concessions to the left wing of the party, but while healthcare could be an obvious target, he doesn’t pose the kind of threat to big pharmaceutical that a Bernie Sanders-type candidate would.
“We do not expect him to have any major impact on Fed stimulus, but his actions on fiscal issues will hopefully be more co-ordinated and predictable than Trump which would be useful for markets,” he said.
Andy Merricks, independent fund strategist
Merricks, manager of the 8am Global fund and independent fund strategist, said the US elections could have a significant effect on the markets as we get nearer November.
He echoed Simon King’s thoughts that the Chinese may value Trump’s protectionism as oppose to Biden’s willingness to work with Europe.
“Either way, a second wave is a worry – not of the virus in this case, but of the US-China trade war,” he said.
Considering that the US is still struggling to contain the virus in parts of the country, the timing of the election could put a self-limiting factor into the current equity rally.
“In the short term it may fret that a Biden win would lead to tax hikes, higher wages, and an increase in regulation,” said Merricks.
Opinion in the US point to the fact that only two of the past six presidents have lost their bid to re-election. Those two, Jimmy Carter and George H.W. Bush lost their bids for a second term in similar fashions, witnessing a slide in popularity due to their handling of crises.
A Trump re-election, said Merricks, may rally right through November but then correct around December.
“It will come with the realisation that relations between the US and China and an escalation in tariffs are likely going to get a lot worse,” he added. “2021 could get off to a rocky start.”
Didier Saint-Georges, Carmignac
Moving into the second part of the year, Carmignac’s managing director and strategist Didier Saint-Georges said uncertainty will matter more for markets as policymakers have already gone out of their way to support the economy. The outcome of the US presidential election is one of those uncertainties.
Trump faces serious questions about his handling of the Covid-19 crisis and a country in a recession, painful for a president who based so much of his 2016 campaign on restoring economic prosperity.
“The link between his mismanagement of the virus and the economic downturn is inescapable and therefore also constitutes a headwind for an incumbent who hoped to base his campaign on his economic achievement,” he said.
Since Trump was elected on 9 November 2016, the Dow Jones Industrial Average index – which Trump often uses as a benchmark for the success of his presidency – has returned 38.86 per cent in US dollar price terms –recovering well from the sell-off in March. However, critics have argued that protectionism and corporation tax cuts is responsible for the record highs of 2019.
Performance of the Dow Jones index throughout Trump’s presidency
Source: FE Analytics
The election aside, Republicans face a situation in that their majority in the Senate could be at risk during congressional elections due to take place at the same time, said Saint-Georges.
“A Democrat sweep has become a realistic possibility, which would open the way to a broad implementation of the Democrat economic platform, favouring Main Street over Wall Street.”
“Markets will certainly adapt to any winner over time,” he said. “But historically, a losing incumbent is rarely well received by investors, and given the circumstances, it is unlikely to be different this time.”
Saint-Georges said uncertainty between now and election day could affect the US dollar and equity markets, however, Biden’s choice of running mate could assuage market concerns.
“The choice of the younger and well-respected California senator Kamala Harris, rather than a more radical profile would certainly be perceived as reassuring by markets,” he added.
Rob Morgan, Charles Stanley Direct
Rob Morgan, pensions and investment analyst at Charles Stanley Direct, said that without Covid-19 the US presidential election would probably have been the most significant geopolitical event of the year.
“It’s still going to be highly influential, as the two candidates are offering very different economic approaches, which will have different impacts on the stock market as a whole and on individual sectors and companies,” he said.
Biden, said Morgan, offers a significantly different domestic outlook to Trump’s ‘America First’ policies. This includes tax increases, green policies that will hit the already troubled oil & gas industries and an extension of Obamacare.
The extent of Biden’s tax reform priorities is vast, proposing a $4trn tax rise over the next 10 years, and a massive green energy transformation. He has outlined plans to increase the rate of corporation tax from 21 per cent to 28 per cent and to impose a 12.4 per cent social security tax on incomes over $400,000.
“None of this would be much liked by Wall Street and investors,” said Morgan. “The US stock market advanced strongly under the early months of Trump’s presidency based on the large tax cuts he proposed making company income more valuable for shareholders.”
Undoing a large amount of Trump’s presidency would likely characterise the early years of a Biden presidency, noted the Charles Stanley Direct analyst. He would likely start his presidency by getting the US to re-join the Paris climate Treaty, which means pledging to make the US carbon neutral with 100 per cent clean energy by 2050. This combined with greener automobile and energy efforts would cause considerable impact to numerous industries in and outside the US.
“This is truly radical stuff if carried out, and a major departure from the status quo that will create substantial winners and losers at a corporate level,” said Morgan.
“If the US votes Biden in, it will be a decisive shift in the world approach to fossil fuels, with the US changing from being a proponent, to the leading advocate of their closure.”
This would no doubt dismantle traditional cyclical stocks but may be more suited to a structurally different world post-Covid-19.
“There will be some great opportunities for innovative businesses that can help fulfil Biden’s vision of a greener America,” he concluded.