Going into 2020, most investors would have assumed that the U.S. Election would be the most influential market-moving event of the year. But, since then, we have experienced a global pandemic that has brought economic activity to a halt, caused mass unemployment and driven bankruptcies to record levels.
Nonetheless, the election is looming, and the markets are beginning to attempt to price in the outcome of November 3rd. Currently polls suggest that Democrat candidate Joe Biden is ahead by between 8 and 14 percentage points (depending on which poll you look at). That is quite a significant lead. It seems likely that Biden is going to take many of the key swing states such as North Carolina and Arizona. Trump’s declining popularity is to be expected, considering the US’ dealing of the Covid-19 outbreak, as well as the recent social unrest against the killing of George Floyd.
Source: Financial Times
It is important to note that the polls need to be taken with a heavy pinch of salt. Back in 2016, the polls failed to predict both Britain’s exit from the EU and Trump winning the U.S. election. Nevertheless, overall, they are clearly showing that sentiment is turning against the incumbent President.
So, what would a Biden victory mean for investors?
On the surface it would seem that the markets would not take well to a Democratic victory. If Biden were to win Presidency and control of the Senate, he would likely raise the corporate tax rate, along with changes to the capital gains tax. He has previously pledged to raise the corporate rate to 28%, which in turn would reduce earnings-per-share by around $20, according to estimates by Goldman Sachs. Then there’s the issue of regulation. Trump’s administration has rolled back regulations, particularly in regards to banking and the environment. The Democrats, on the other hand, have always been more inclined to step up regulation, which could see potential headwinds to the energy and financial sectors.
The markets will also likely take a negative view on any significant involvement in government by Elizabeth Warren. The Massachusetts Democrat is currently favourite to be selected as Biden’s Treasury Secretary. Warren has previously called for breaking up the big banks, increasing capital requirements (capital set aside to cover unexpected losses) and introducing a wealth tax. All of this does not bode well for Wall Street. Financial stocks would certainly come under significant pressure with Warren leading the Treasury.
However, a Biden victory might not spell complete disaster for the markets (as much as certain media outlets such as Fox News would disagree). Some analysts have pointed out that Biden would provide a more predictable approach to foreign and trade policy. After all, Trump’s random and sometimes unwise, inflammatory comments in regard to China and trade, have caused some extremely volatile trading days. Furthermore, it is worth noting that the market’s rally since March has been primarily driven by the Fed stimulus, not any Trump policy. Regardless of who is President, the Fed are likely to continue their unprecedented support for the U.S. economy.
The scenario I actually see as most bullish (optimistic) for the markets, and the broader economy, is the combination of a Biden victory, but with a Republican-controlled Senate. This is the scenario that J.P. Morgan have described as the best outcome. It would ensure that the Trump tax system stays in place, while U.S. government leadership would be free from the turbulence and unpredictability under Trump. Biden would have a fresh start at regaining America’s soft power, while normalising relations with China, the EU and many other parts of the world.
Election years are always important points in the evolution of financial markets; this year should be no exception.