What will the outcome of the 2020 US election mean for world markets?
Some analysts have a pessimistic view of how the markets will react to a Democrat win – especially if it’s a progressive candidate such as Elizabeth Warren
It’s arguably the single biggest event in the markets this year: the US presidential election. But predicting who will win is easier said than done – and while some polls indicate Donald Trump is on course for a thumping victory, others suggest he faces a crushing defeat.
According to the RealClearPolitics average of opinion polls, Joe Biden, Bernie Sanders and Elizabeth Warren are currently the three contenders with the most support in the race for the Democratic presidential nomination. Each of them is polling in double figures, while others in the crowded field – Pete Buttigieg and Michael Bloomberg among them – languish behind.
When it comes to how these frontrunners would fare in a race against Trump, the picture is mixed. The latest opinion poll averages suggest Biden would secure 48.5 per cent of the vote, compared with Trump on 44 per cent. Sanders would win with 47.8 per cent – a narrow margin over Trump’s 45.2 per cent. Meanwhile, at 46.2 per cent, Trump has a razor-thin lead of 0.2 percentage points over Warren. Of course, these polls have been wrong before – and the incumbent doesn’t necessarily have to win the popular vote in order to secure four more years in the Oval Office.
According to JPMorgan’s analysis, despite Trump’s precarious standing in the polls, he has a good chance of being re-elected come November. Incumbent presidents have always secured a second term if the economy avoided recession in the months before the vote – meaning history could be on his side if growth continues.
So: what would a Trump win mean for the markets and how would they react if a more progressive candidate defeated him? Could a stock market crash be on the cards?
What does research say about the impact of the US election on world markets?
Goldman Sachs says investors should have three key dates in their diary as the race hots up. The Super Tuesday primary on March 3 will see 15 areas representing a third of America’s population determine who they want to run for the presidency. This paves the way for the Democratic National Convention to pick its candidates for president and vice president on July 13. Naturally, the third and final key day is the election itself on November 3.
In terms of how the markets will perform before November, analysis from CFRA Research shows that the stock market clocks gains in four-fifths of election years – with the S&P gaining an average of 6.6 per cent. But it’s the run-up to a ballot that can be most telling. According to LPL Financial, green territory for the S&P 500 in the 90 days before the vote usually means that the party holding the presidency will win again, but if the index is in decline, the opposition will gain power. Only three of the past 23 elections bucked this trend.
It is fair to say that uncertainty does loom in election years as companies hold off on big spending plans. And, according to UBS, there is an established downside to the election cycle, with price to earnings ratios in the S&P 500 falling by a median of 2 per cent.
Tax, tariffs, environment, healthcare: where the candidates stand
Already, one of the hot-button topics of this election has been the 2017 Tax Cuts and Jobs Act – a Trump administration policy that slashed corporate income tax from 35 per cent to 21 per cent. All three of the Democratic frontrunners are in favour of revisiting this policy to some extent. Biden believes this rate should increase, although not as high as they were before. Meanwhile, Warren wants to introduce new levies on corporations who report profits beyond $100m, and slap a 35 per cent tax in foreign earnings.
Goldman Sachs analysts predict that corporate tax rates will increase if Democrats gain a majority in the Senate come November – even if it’s a small one. They also estimate that a full review of the 2017 act would see S&P 500 earnings tumble by 11 per cent next year.
In terms of Trump’s stance, it seems likely that he could go further if he was emboldened by another win. There has been talk in the White House of “Tax Cuts 2.0” – targeting individual income tax by reducing the 22 per cent marginal rate to 15 per cent.
On tariffs, Trump recently suggested that he may try and wait until after November to finalise the second part of a trade deal with China – spooking some investors who fear another year of uncertainty. It is worth noting that the likes of Warren and Biden do support the use of tariffs in certain circumstances, but both have disagreed with the “reckless” way the president has acted. Biden is against such measures because he believes that everyday consumers, manufacturers and farmers in the US are those who end up suffering most.
All three of the Democrat frontrunners are in favour of raising the federal minimum wage to $15 an hour – and such a measure could affect the share prices of major restaurants and retailers who rely on low-paid workers. The upside of such a policy is that consumers would be likely to spend extra income on things such as home improvements, healthcare, entertainment and transport – boosting the performance of companies in these sectors.
Healthcare stocks often perform underwhelmingly in election years – dampened by the uncertainty of which candidate will win, and what their policies will be. While Sanders and Warren favour Medicare for All, Biden would prefer expanding the controversial Affordable Care Act. Strategists such as Keith Parker of UBS say Warren’s radical plans would struggle to become reality unless the Democrats flipped the Senate. The same applies for her so-called “Green New Deal” and proposed ban on fracking, which would have a detrimental effect on energy stocks.
On Wall Street, some firms have been creating bundles of investments based on the different outcomes that are possible in this election. While shares in defence, aerospace and oil exploration companies are expected to thrive if Trump wins again, shares in green energy providers would undoubtedly flourish if a progressive Democrat gets in.
A unified government?
Some analysts say that, to assess the real impact the election will have on the markets, it is important to look at the federal elections as well as the presidential race. A unified government, where the Senate, House of Representatives and presidency are all controlled by the same party, could trigger a sell-off on the equity markets. According to Goldman Sachs, median returns on the S&P 500 stand at about 9 per cent under a unified scenario, but gains rise to 12 per cent in times of division.
Although a unified Democratic federal government may be unlikely, equity analysts such as Goldman Sachs’ Tim Moe have said it could cause a correction of up to 20 per cent on the S&P 500 because it would be easier to repeal the corporate tax cuts. Some hedge fund managers, like Paul Tudor Jones, are even more fatalistic – warning a Warren win would cause index to plunge by 27 per cent.
It is always worth taking these predictions with a big pinch of salt. In previous election cycles, naysayers warned that Barack Obama and Donald Trump alike would cause the markets to crash. In 2016, a Wedbush executive claimed stocks would plummet by 50 per cent if Trump won. Fast forward to today, and the S&P 500 has actually risen by more than 44 per cent since he was elected. Even if the Democrats cause a massive upset in the autumn, there’s no guaranteeing how the market will react in the long run.
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