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Let's talk about markets

What will the US elections do to markets?

The question whether Democrats or Republicans will have a majority in the House of Representatives and Senate matters to markets.

USA political symbols - elephant and donkey

Charles Stanley

in Let's talk about markets


According to the polls, the Presidential election is Joe Biden’s to lose. He has been comfortably ahead by around 8% in the national polls for some time. He is also ahead in most of the crucial swing states that will determine the election, based as it is on Electoral College votes state by state. The House of Representatives is likely to maintain its Democrat majority, whilst the Republicans 53-47 advantage in the Senate is at risk. 23 of their seats are up for election against only 12 Democrat seats. The Democrat seat of Alabama is thought to be vulnerable, whilst the Republicans are thought to be vulnerable in Arizona and to have six of their seats in the too close to call category in Colorado, Georgia, Iowa, Maine, Montana and North Carolina. The House of Representatives currently has a Democrat majority, with 223 seats against the Republicans on 188. Current polling suggests the Democrats are safe with 24 contested seats being too close to call. If Republicans won all of those the Democrats should still be the larger party.

The betting has not been as supportive of Mr Biden as the polls. The Trump campaign is still very energetic so most commentators are reserving the possibility of a surprise Trump win despite the clear message from the polls. The Trump team point to the narrow advantage the President still has on the issue of the economy, and spend time setting out the economic successes prior to the Covid-19 lockdowns. They contrast Republican wishes to get the USA back to work quickly against their view that Democrats, in states they run, have gone in for more restrictions on enterprises. They also seek to drag the agenda onto law and order where they argue they work with the police to tackle violence and out of control protests, where the Democrats show more concern about highlighting bad policing and the rights of the protesters. Meanwhile, the Biden campaign always seeks to put the virus centre stage and plays to people who think the President has been too cavalier in his response. They also wish to major on the question of the character and conduct of the President which they regularly condemn.

So we need to ask whether Mr Trump could pull back the deficit in the polls and win those swing states. Some Trump supporters claim the pollsters will be wrong again this time as they were over the result in 2016. Then the polls seemed to underrepresent the groups most likely to vote for him. Some think Trump supporters are playing hard to get or playing with the pollsters, and think the betting is a better indication of their intentions. Others think that in the last few weeks the polls will narrow, reflecting the pressure of the campaign and further inspection of the abilities and views of Mr Biden. Some think electors may end up switching to Trump on election day itself when they look at the tax implications for example.

Mr Biden’s team think they need to avoid mistakes and avoid overexposure of their candidate, whilst still pounding away about the character issues they have spent four years exposing, and punching the bruise of the handling of the pandemic and the effects policy has had. This time Mr Trump is the incumbent, responsible for the current problems, not the challenger. The commentators and experts incline to the view that the polls are probably roughly right, and the deep recession induced by the pandemic response makes it very difficult for the Trump campaign to pull it back. We conclude that our base case should be a Biden win, with a 70% probability. It is not even higher because we also recognise that the Trump base may prove loyal and there could be last minute changes of opinion given the lack of strong conviction for Mr Biden amongst swing voters.

We assume that the House of Representatives will remain Democrat-controlled even if Republican voting patterns pick up in the last days of the campaigns. The Senate could go either way, as most polls and commentators think more seats are too close to call than the current narrow majority the Republicans enjoy. This means that a Trump win with a Republican Congress is very unlikely, whereas a Biden win with a Democrat-controlled Congress is possible, as is a Biden win with a Republican-controlled Senate surviving. This matters a lot, as a President with the other party in control of either the House or the senate struggles to achieve much, as he will be unlikely to get through reforming legislation of the kind he wants. In particular, Republicans would find it difficult to push through tax cuts, and Democrats would find it difficult to enact tax rises without control of the whole Congress.

A Biden Presidency would offer a very different policy approach and a very different style of governing to the Trump administration. The Democrats would want to put through substantial tax rises on businesses and the wealthy. They would wish to force changes in corporate behaviour especially over green policy and would be hostile to oil, gas and coal companies. They would actively promote green energy, electric vehicles and further changes to home heating and fuel use. Foreign policy would start by wishing to work more closely with allies. Mr Biden is hostile to China on a wide range of issues, including civil rights matters in Hong Kong and western China, which makes it unlikely there would be a rapprochement between the world’s two largest powers.

So what does all this mean for markets? The current deceleration in Fed support for markets is probably a more important factor than the Presidential election, but the election does add to the worries of investors beginning to doubt the market or wanting to take profits. Were Mr Biden to win with Democrat control of the Congress the tax rises and more hostile approach to various sectors would mean lower stock market values. Anyway, a Biden Presidency will be more cautious in countering the virus, making more controls a possibility that will be damaging to jobs and output whilst in place. It looks as if we are entering a period of a lower dollar, which will be beneficial to emerging markets and may favour Asia a bit more. With control of the Congress, a Biden Presidency would hit exposed sectors like carbon-based energy hard. Were Mr Trump to achieve a surprise win we still see shares weakening a bit given the cooling monetary stimulus, adding to pressure on the Fed to do more to foster expansion. We would watch Fed reactions, as it will probably take more Fed money creation and market intervention to take shares to higher levels.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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