The US Election: The usual and unusual

The usual

Election outcomes are key drivers of asset prices and investment flows because markets hold various beliefs about the political and economic policies of each party.

In fact, it’s deeper than that because Presidential elections aren’t only about who enters the White House, but which party controls which legislative House of Government. From a 30,000 feet view, these are the expectations of the various outcomes:

A Trump second term implies low tax regimes and limited constructive fiscal spending, which is a classically fiscal conservative tack.

The key factors are:

  • Persistently low interest rate.
  • Generally business-friendly; detrimental to specific sectors.
  • US equities high; EM equities suppressed.
  • ‘America First’ unilateral trade policy.
  • Broadly strong Dollar.
  • Direct pressure on Federal Reserve independence.


A Biden Presidency signals more moderate policies, including fiscal spending, which is expected to drive global inflation.

The key factors are:

  • Rising interest rate expectations due to greater fiscal spending.
  • More regressive tax policy and increased cost of business.
  • EM equities higher; US equities plateau.
  • Focus on patching trade relations.
  • Weaker Dollar due to greater global growth prospects.
  • A hands-off approach to Fed policy.

Obviously, the candidates themselves are dependent on which parties control the House of Representatives and the Senate to transform their ambitions into reality.


The above general characteristics are modified by the below:

  • If either candidate sweeps both Houses under their term, there will be few inhibitions, and you could expect to see the purest distillation of their platform objectives.More tax rebates from Trump and greater fiscal spending from Biden.
  • If the opposite party to the candidate holds both Houses, the status quo is the most likely outcome with a minor retrenchment of Trumpian-era policies under Democrats and vice versa.
  • The split House outcome under Biden looks like a positive for domestic and international growth as trade tensions subside, but budget constraints will be evident initially.
  • The split House scenario under Trump is essentially the status quo. The market has seen these conditions very recently, so uncertainty is not as evident. A strong Dollar, low-growth environment to resume with periodic flare-ups in trade tensions.

 

The unusual

This election may not be a one-day event where the winner is known after all votes are counted on the day. The ongoing pandemic means voting by mail is expected to be much more popular this year to avoid crowds of people congregating to vote. According to the New York Times, more than double the number of mail votes are expected compared to 2016, totalling 80 million votes. As a result, the outcome of this year’s election may not be known for days, or even weeks after the election date – particularly in states that are underprepared for mail voting, where the voting is tight, or where extended voting deadlines have been granted. On a positive note, the turnout rate for this year’s election is expected to be among the highest since mail voting makes the election process more accesible to more Americans. 

2000:
In one of the closest elections in US history, Republican Bush lost the popular vote but won the electoral vote after a recount was required in Florida to confirm a majority. Polls pointed to a Republican victory in the six weeks leading up to the election night. The US Dollar Index climbed prior to the election, before weakening in the final two weeks. After the election, the Dollar rose for another two weeks before tumbling for the remainder of the year.

2004:
The incumbent Republican President won with a slim, but clearer victory than the last, winning both the electoral and popular vote. In the months leading to the election, the polls consistently and correctly pointed to a Republican win. The US Dollar Index sharply fell in the weeks before and after the election while GBP/USD rallied over 9% during this period.

2008:
After eight years of a Republican House, Democrat Obama won the electoral and popular votes by a wide margin and by the end of summer 2008, the polls were consistently pointing to a Democrat win. Markets were experiencing extreme volatility during this period as the election occurred during the peak of the Global Financial Crisis. Demand for the safe-haven Greenback surged, and GBP/USD fell over 20% during the final quarter of 2008.

2012:
The incumbent Democrat President was victorious after winning both the electoral and popular vote in a closer contest than his previous win. Over the summer of 2012, the polls were pointing to another Democrat win, but the gap closed and switched to a Republican victory in October after the first Presidential debate. Leading up to the election, GBP/USD drifted lower as the US Dollar Index climbed. The trend reversed completely in the weeks after the election.

2016:
Republican candidate Trump won the electoral vote but lost the popular vote by nearly three million. Trump’s victory surprised all as the polls consistently pointed to a Democrat win in the months leading up to the election. The US Dollar Index climbed in the weeks leading up to the election, with the trend accelerating following Trump’s surprise win. GBP/USD fell throughout this period following the Dollar’s rise and the UK’s vote to leave the EU that year.

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The likely path?

It’s looking very one-sided for the Republican Party right now; the polls are saying it, and the market is pricing it – Donald Trump is going to lose the US election next month, and the Republicans might even lose the Senate in the process. Trump is consistently polling lower than Biden in most of the key battleground states, with Biden enjoying a wider lead than Hillary Clinton did in 2016. The Biden campaign is also cash-rich, having broken fundraising records in August and September allowing them to micro-target specific voter groups. The man dubbed ‘Sleepy Joe’ seems to have one foot in the Oval Office.

What might change?

Trump might be able to claw back the handful of states that will decide this election, but the obstacles between him and an unlikely victory are far-greater than those of 2016. Trump’s failure to successfully navigate the nation through the coronavirus pandemic has made him the unpopular incumbent at a pivotal moment. However, the Republicans have shown some success in recruiting new voters in key swing states, enough, they believe, to make a concrete difference due to these groups being under-represented in polls. Expanding the electorate by virtue of boosting voter turnout in industrial Midwest states could be the lifeline Trump needs to stay in the race.

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