The 2020 presidential election is sure to have an impact on global financial markets. Mike Schnitzel speaks with a variety of market observers to discuss the potential outcomes
This year’s US election threatens to be one of the most contentious and bitter in recent memory. In ordinary election years, investors tend to take a more conservative approach to the markets, based on the uncertainty of who will prevail. This year, the election is coupled with the US government’s response to the Covid-19 outbreak, and the effect that has had on US public debt. In this article, we look at five potential scenarios that could play out between now and November, and ask market observers and participants what they think each scenario would mean for the stock market.
A Democratic sweep Most polls have Democratic presidential candidate Joe Biden leading President Donald Trump nationally. If Biden is victorious and Democrats sweep both houses of Congress, the market would probably react negatively, at least in the short term, according to market observers.
This is because of the uncertainty associated with any new administration. There is, however, a sense that the market has begun pricing in this scenario.
‘The leadership coming out of the White House has not been particularly seen as positive by a lot of people,’ says Robert Jenkins, global head of research at Refinitiv Lipper. ‘I don’t think a Biden win will mean a massive sell-off – because the market is already starting to think that will happen.’
Sam Stovall, chief investment strategist at CFRA Research, says a Democratic victory across the board has historically led to an average market decline of 2.5 percent in November, and this has happened five times since the end of World War II. After the initial shock, however, the market has managed to recoup gains by year’s end.
‘[When this happened before] investors were alarmed by the sweep because Wall Street does not like uncertainty,’ Stovall says. ‘That quickly goes away, though, because December was positive in every instance after that. In the subsequent calendar year, the market was higher by 10 percent and rose in price about 80 percent of the time.’
Allison Schrager, economist and senior fellow at the Manhattan Institute, says Biden and his running mate, California Senator Kamala Harris, seem less ideological and more pragmatic than other potential candidates, but a sweeping Democratic victory in November could lead to the implementation of more left-wing policies that would be detrimental to financial markets.
From current messaging, however, nobody is expecting anything extreme from a Biden presidency. ‘If we had a President [Elizabeth] Warren I would expect markets to crash, but Biden is not proposing anything extreme,’ Schrager says. ‘They might drop for a day or so, but markets have already priced in a Biden victory.’
Biden wins the election, but the GOP retains the Senate If Biden wins but Republicans retain control of the Senate, it will be difficult for Democrats to enact any sweeping changes to tax policy. Biden has proposed raising the corporate tax rate from its current level of 21 percent to 28 percent.
‘Republicans and Democrats may find common ground on miscellaneous topics – including some social justice issues – and on annual, must-pass legislation, such as appropriations measures and the National Defense Authorization Act,’ notes Stacy Swanson, public policy adviser at Squire Patton Boggs. ‘But they would likely fail to advance any significant policy changes that the Democrats may seek to push from the White House and the lower chamber of Congress, assuming the Democrats retain a simple majority vote control (217) in the House of Representatives.’
The Democratic platform is not geared toward growth, and that is something markets will view negatively, adds Francis Scotland, head of global macro research at Brandywine Global.
‘The Democrat platform is a redistribution tax platform designed to flatten out the income curve by increasing taxes at the wealthy end of the spectrum,’ he explains. ‘[Democrats] also want to raise the capital gains tax rate to match the income tax rate, and this is pretty significant stuff.’
Overall, a Biden victory alongside the GOP retaining control of the Senate would likely be viewed very positively by the markets, according to Stovall.
‘It would means some distasteful legislation wouldn’t be shoved down investors’ throats in terms of taxation and regulation,’ he says.
Harris as vice president calms investor nerves Biden’s selection of Harris as his running mate has helped to soothe some nerves on Wall Street as well as in Silicon Valley.
‘Wall Street is breathing a sigh of relief to a degree as he could have gone for a more progressive left-winger, so this should be a little helpful in tempering any sell-off that might occur if Biden wins this fall,’ Jenkins explains.
‘Of course, markets have generally favored Republicans no matter who they are, so there has been a bit of trepidation about how this overvalued market might react to a Democrat in the White House.’
Harris’ selection is also popular with leaders in Silicon Valley, as they view her as someone who is not antagonistic to them. ‘Harris is familiar to these companies from her days as California’s attorney general, where she reportedly sought to work with the technology companies and not against them,’ Swanson explains.
Markets would react negatively, however, depending on Biden’s cabinet choices – for example, if Warren were tapped as Secretary of Energy or to lead the Department of the Treasury. ‘If Warren is put in charge of energy, you can kiss goodbye to any prospect of an energy recovery,’ Stovall says.
‘Green technologies and companies would also benefit from a Biden administration (which has its Green New Deal approach), whereas the oil and extractive industry would benefit from a sustained Trump administration that eschews climate change policies,’ Swanson adds.
Trump has frequently debunked climate science and pushed for fossil fuels, including calls to revitalize the coal industry. And fossil fuel executives – such as Continental Resources founder Harold Hamm and Energy Transfer CEO Kelcy Warren – have contributed heavily to Trump’s re-election campaign.
Trump wins a second term in November If Trump were to win election to a second presidential term in November, the markets would likely react positively, at least in the short term. But Schrager believes a Trump victory would lead to more market volatility in the long run because of his chaotic style as president.
‘I think markets have a lot of volatility because Trump always creates a lot of uncertainty,’ she says. ‘While he would be more favorable in terms of taxes and regulations, I think markets could benefit from a calmer news cycle, which I believe Biden could provide even if he raises taxes. A Trump win would mean you should expect chaos for another four years.’
Swanson agrees, saying a Trump victory would be an overall positive for markets, but would still be a bumpy ride for four years.
‘Should Trump be re-elected, markets will likely continue to react, as they have for the past four years, to an uncertain policy environment that includes announcements – such as Section 232 tariffs and threats and the TikTok ban – made via tweets,’ she says. ‘Despite the uncertainty, however, the president’s pro-business policies, such as lowering corporate tax rates and deregulations, have contributed to sizable stock market gains over the past four years.’
Scotland believes whoever wins will have to deal with chaotic public balance sheets that have been decimated by the Covid-19 pandemic. ‘It will be interesting to see how both sides are going to deal with public finances,’ he says. ‘Democrats can say, You want to cut taxes, but we’ve got a public debt crisis, and Republicans can say, You want to increase taxes but in the process you are going to hurt the economy and undermine your ability to collect taxes. When you raise taxes you actually diminish your tax take. That is a supply-sider’s argument.’
Chris Dyer, head of global equity investments at Eaton Vance, agrees that public finances are going to be a difficult issue to deal with and will likely lead to higher taxes at the expense of corporate balance sheets and economic growth.
‘In the longer term, we believe upward pressure on US corporate tax rates is related to something few investors are currently focusing on: the level of government debt,’ he says. ‘The International Monetary Fund estimates that the US government debt to GDP coming out of the Covid-19 crisis will be 43 percentage points higher than the eurozone’s, while the US budget deficit is 7.1 percentage points higher. An obvious way for the US to address this debt level is to increase corporate taxation and to spend less, both of which will be impediments to US economic and earnings growth.’
A contested outcome and the Covid-19 pandemic The least-desirable result for the markets would be a contested election result. ‘If we have anything close to a contested result there will be market turmoil,’ Schrager predicts. ‘A contested election could be very bad for the markets.’
Many observers believe the most dominant market issue overall in the near term is how the Covid-19 pandemic plays out. ‘If Trump wins a second term, the market bounces in the short term because it has resolved the uncertainty of a brand new administration,’ Stovall explains. ‘The focus will then immediately be on a virus vaccine. The market will want to get back to business and creating a defense against this virus that will allow America to get back to work.’
Biden’s relative moderation as the Democratic nominee is a relief to the markets, as he is not looking to reinvent the wheel in terms of the economy, Stovall adds. ‘I think this election is second order to the virus, but I don’t expect too many movements if Biden wins,’ he says.
‘The biggest risk is a contested election, which would throw the markets into turmoil. If we have half the electorate not accepting the results, institutions that the markets depend on for long-term stability will suffer. It could be a long-term problem, which I would worry about.’
