There are two ways to think about the US election: either it matters for markets, or it doesn’t.
Most investors start off by saying it doesn’t matter. They’ll point out that historically there are no strong relationships that suggest markets care who is in the White House. They’ll say that the outcome is completely unpredictable, and there’s no informational edge. They’ll say that policy won’t change much anyway, so don’t worry about it.
Then we get to within a month or so of the election. Everyone changes their mind. Suddenly, it MATTERS. Opinion polls and betting markets are followed intimately. Everyone is suddenly an expert on the Senate and the House races, and the differences between the Electoral College and the popular vote. People remember Nate Silver again (and in fairness, https://fivethirtyeight.com/ is a great website) and get sucked in to the drama. “This time it’s different!”
The problem (as in US politics itself) is polarisation – both starting points are too extreme. Politics does matter to markets over time, because ultimately politics shapes economies – just look at Russia over the last sixty years compared with America. But at the same time, the outcome of any single election is never going to derail the long-term economic trends – a Democrat win won’t uninvent the internet.
We think the best approach with the US election (with any significant political risk) is to stay informed and engaged, while not getting overexcited about any single outcome. Instead, we try to consider the most probable scenarios, and think about how our portfolios might be negatively impacted. It’s about risk mitigation rather than forecasting the outright result.
If there are some positions which are extremely sensitive to the outcome, then we want to be aware of them. And we also want to prepare for any opportunities that might come about after polling day.
Recent talking points
We’ll quickly address a couple of the recent talking points, before giving our view on the post-election fallout.
Trump and COVID-19. Lots of people are comparing the situation to the polling jump which happened when Boris Johnson caught the virus. We think that’s the wrong comparison – Johnson wasn’t facing an election, just an opinion poll. A “sympathy vote” is not a real vote in the polling booth.
Uncertain/delayed results. Close races have happened before. Delayed results have happened before. And actually, while some states have extremely archaic voting systems and tallying processes, there are enough swing states which count the ballots within 24 hours; Arizona, Maine and Florida for example. Roughly, if Trump doesn’t win Florida, he won’t win. If Biden doesn’t win Maine and Arizona, he won’t win.
Will Trump refuse to leave? The US constitution was written with this problem exactly in mind. And bluntly, just change the locks once he leaves the White House to play golf.
Thinking about outcomes
So looking ahead a month, what might we see on the morning of Wednesday 4 November? All evidence suggests that the House of Representatives will remain in the hands of the Democratic Party, so there are really only three credible options for the layout of the US government: the status quo (Trump as President and a Republican Senate), a mixed bag (Biden as President with a Republican Senate) or a Blue sweep (Biden as President and a Democratic Senate). So what will they mean?
Status Quo (President Trump, Rep. Senate, Dem. House)
Four more years of ‘Making America Great’. Or more likely, four more years of very little in the way of significant long-term policy changes. All of Donald Trump’s significant policy changes (the tax cuts and altering environment and immigration laws) took place in the first two years of his term, when the House of Representatives was dominated by Republicans. Since the 2018 elections swung the House back to blue, Washington has been on pause – Trump’s only outlets have been Twitter, and taking occasional swipes at China (which the Democrats largely support).
A continuation of the current state of affairs wouldn’t be bad for markets. We’d expect to see further bouts of trade war related volatility, and probably a lot more in the way of social unrest. But in general, the environment would be pro-business, with an added boost for the US consumer due to COVID-19 related stimulus.
There is one risk which is a little overlooked at the moment – large technology companies are in the cross-hairs of both the House and the President. The House is worried about the monopolies forming for the likes of Google, Facebook and Microsoft, and Trump is becoming more critical too – Facebook censored one of his posts and Twitter allegedly locked him out of his account. It may be that those huge (largely untaxed) revenue streams are a target too tempting to ignore.
Portfolio Impact: Little to none. Business as normal, with our diversified non-US exposures mitigating the risk of anti-tech sentiment.
Mixed Bag (President Biden, Rep. Senate, Dem. House)
This result would drastically change the feel of US politics, with a much calmer White House tone being perhaps the most obvious point. However, the potential for genuine political impact would be muted – with a Republican Senate likely to prevent wholesale changes, much like the final two years of Barack Obama’s Presidency.
This combination would be positive for economic stimulus programs, particularly for infrastructure investment across the US, with an emphasis on environmental projects. The trade wars would actually continue, but in a less aggressive, stop-start fashion. Regulation of many industries would increase – technology, energy and banking in particular – but there would be no significant tax hikes.
Portfolio Impact: Little to none. Again, reasonably close to business as normal. A tighter regulatory environment would be more than offset by the COVID-19 stimulus wave, and the focus on environmental, social, and corporate governance (ESG) industries could well be a real long-term positive. Predatory drug pricing would certainly come under fire, but this would be unlikely to affect the long-term prospects for our healthcare position.
Blue Sweep (President Biden, Dem. Senate, Dem. House)
This would be the outcome with the most potential to impact financial assets. If the Democrats can achieve a majority in the Senate, lots of Democratic policies will suddenly become a lot closer to reality. If the Democrats achieve a sizeable majority in the Senate, then more radical changes to the healthcare and banking sectors might well come back onto the agenda.
However, it’s important to remember that this is AMERICA. Joe Biden is not Bernie Sanders; the US is still very much pro-business – but smaller businesses would be more favoured than the billionaire-run tech giants.
An increase in corporation tax and regulation would certainly drag on stock prices, but that negative would be counteracted by large scale spending on infrastructure, an increase in the minimum wage, and a larger than expected COVID-19 related stimulus package. Giving the poorer sections of US society more cash to spend is perhaps the easiest way to stimulate the kind of sustainable growth which might begin to eat away at the growing debt pile.
Portfolio Impact: Short-term volatility, no long-term change. Healthcare companies would be hurt in the short term as investors try to price the potential changes to the US medical system. However, the pain there is unlikely to be greater than in the technology or finance sectors, where similar scrutiny is going to be applied. Perhaps the biggest risk would be to our overall pro-equity positioning – but even that might not be a problem, given the wave of stimulus.