US Elections: Many candidates, many views, but not a major headwind for markets

US Elections: Many candidates, many views, but not a major headwind for markets

Americans will go to the polls on Tuesday, 3 November 2020 to elect a President, Senators, Representatives, Governors, State Legislators and Local Officials. The first step – the Iowa Caucus – was held Monday night.

It didn’t go quite as planned. Officials had to delay reporting, citing a need for “quality control” checks. At the time of writing, 71% of districts have reported results. Mayor Pete Buttigieg is in the lead, receiving 26.8% of the vote and ten delegates. He was followed closely by Senator Bernie Sanders with 25.2% of the vote and ten delegates. Senator Elizabeth Warren (18.4%, four delegates) and Former Vice-President Joseph Biden (15.4%, no delegates) round out the top four. Polling data from late January had Sanders and Biden vying for the lead, so if Biden remains in fourth that would be the biggest surprise (, 20 Jan – 2 Feb 2020 average).

Who’s in the hunt?
President Trump is expected to run again—even if he is removed from office by the impeachment process. On the Democratic side, it remains a crowded field.
One party, many views
There are stark differences in views of the Democratic candidates. Biden and Buttigieg can be described as “moderate” democrats. They favour slightly higher taxes and increased social spending, but are not seeking radical changes in government policies. Sanders and Warren, in contrast, have proposed creating a universal healthcare system, breaking up banks and large technology firms, taxing wealth, and making college free. We don’t have as much information on Bloomberg’s views; due to his late entry to the race, he hasn’t participated in any of the 12—yes, 12!—democratic debates. From what we do know he is more closely aligned with Biden and Buttigieg.

How will markets react?
In our Counterpoint 2020, we asked “how will markets react to the US presidential election?” As you can see in the table within the appendix, some Democratic front-runners have proposals that would dramatically change taxes, regulation and spending. Concerns about rising inequality have boosted populist candidates across Europe and the US. In an investor survey conducted by Bank of America in January 2020, the US elections replaced trade tensions as the top concern.

We don’t share that view. The presidential election is unlikely to be a major headwind for the US equity market in 2020 or beyond. President Trump and many of the Democratic candidates support policies that would be favourable for markets. And, the more extreme policies proposed by Warren and Sanders would need support from the Senate and House or Representatives to become law. Not all Democrats share their views, so even if the Democratic Party controlled both it would not assure implementation of all their proposals.

Looking at historical data, US equities tend to rise in election years. Between 1928 and 2016 the S&P 500 Index rose on an average of 10.71% in election years (Bloomberg). The economy is a key issue. President Trump has used his early campaign events and advertisements to focus on wage growth and low unemployment. Due to the nature of the electoral college system, the Presidency is often decided by a small group of “swing states”, such as Michigan, Wisconsin, Pennsylvania and Florida. Manufacturing jobs are important in these states, and voters are receptive to the idea of higher tariffs on foreign goods. President Trump may have to balance his desire for a win at the negotiating table with voters’ preference for a tough stance on trade.

In addition to the “swing states”, independent voters are also a large force in American politics. According to a January 2020 poll conducted by Gallup, 45% of Americans consider themselves to be independents, 27% Republicans, and 27% Democrats. A successful candidate would need to motivate independent voters to support her/him at the polls.

It’s not just about the Presidency in 2020; elections will also be held for the House of Representatives and one-third of the Senate. These bodies have to approve new legislation, so if party control is split then substantive changes become less likely. President Trump was able to enact tax cuts in December 2017 when Republicans controlled the House and Senate. He’s had less success since the Democrats took control of the House of Representatives in 2018.

Regardless of who wins, we expect China and trade tariffs to be a persistent issue. Adopting a tough attitude on trade plays well in rural areas, some of which have been damaged by closing factories. A Democrat might go about it in a different manner, but don’t expect tariffs to go away as an issue. We also expect regulation of technology firms to be an issue, as this has bipartisan support.

We don’t expect there to be a large impact on the US dollar. Both parties would run fiscal deficits and borrow more. This could put upward pressure on US interest rates if more debt is issued than investors have appetite for. But, this is a low probability event. The US dollar remains the world’s reserve currency and we expect there to continue to be demand for its debt.

Trump re-elected: We would expect more of the same—which has positives and negatives for markets. Ongoing fiscal stimulus, either through reduced taxes or higher spending would support the economy. Defence spending was increased under Trump and would remain elevated, supporting producers of planes and weapons. But, his unpredictability in foreign affairs and trade would add increased risks. For example, the killing of Iranian major general Qasem Soleimani in January briefly unnerved markets and created increased tensions between the US and Iran.

Democrat elected: The degree of change would depend on the candidate, but at the very least we expect proposals for tax increases, new regulations for drug prices, increased spending on clean energy, a higher minimum wage, and expanded medical coverage. There are substantial policy differences among Democratic candidates, so how might those impact specific sectors?

Sector Impacts

Healthcare: All democrats support some expansion of healthcare and measures to reduce drug prices. Medicare for all, supported by Warren and Sanders, would be a radical change. Medicare is a government funded healthcare programme for those aged 65 or older and some younger people with disabilities. By making it available to all Americans, the US would move to universal healthcare provision. According to Warren’s plan, the cost would be circa $2 trillion per year over the next 10 years. For reference, the US government budget for 2018 was $4.1 trillion and of that $1.1 trillion was spent on healthcare (US Office of Management and Budget). This would require significantly higher taxes for corporations and individuals. It would also lead to significant changes in the healthcare industry. Some form or private insurance would likely continue to exist, but the market would shrink dramatically. The other aspect of healthcare where candidates disagree is how to respond to high drug prices. Measures such as breaking patents could lead to sharp drops in valuations for pharmaceutical companies. Even lighter-touch proposals, such as linking costs to overseas prices, would impact profits.

We have a positive view on the healthcare sector, despite these potential headwinds. Demand for healthcare is growing, both from an ageing population and a rising middle class in Asia. We think it is unlikely proposals such as breaking patents will be implemented.

Technology: Warren and Sanders have stated that they would look up break up large technology firms, such as Amazon, Alphabet and Facebook. These firms have substantial market power, but they have also benefitted consumers by lowering costs. They are modern conglomerates, combining business such as online advertising, driverless car technology, messaging, cloud computing, and sales of retail goods. The threat of a break up doesn’t worry us for a few reasons:
The bigger risk is increased regulation—ideas such as holding platforms accountable for the content users post and making it harder for personal data to be used to target consumers. These issues resonate with voters and have some bipartisan support. Our view is that technology companies will be able to adapt to new rules, although it could have a short term impact on profits.

Energy: President Trump pulled out of the Paris Climate Accord, and has not focused on climate change or renewable energy. We would expect a Democratic president to take a dramatically different course. This could be in the form of subsidies for clean energy, government-backed research, tax incentives to buy electric vehicles, or funding for home insulation. We would expect companies involved in these areas to benefit. The losers would be oil companies. Several candidates have stated they would like to stop or reduce fracking. As mentioned in our 2020 Outlook ‘Counterpoint’, we maintain our long-term negative view on the energy sector.

Infrastructure: This has been a common pledge for candidates in recent years. In his 2016 campaign, President Trump stated that he wanted to invest $1 trillion in infrastructure over 10 years. Democratic candidates also support affordable housing and infrastructure investment—the rub is how to fund it and find an approach that can get the backing of the Senate and House of Representatives. If this were implemented it would boost construction and real estate companies.

We will monitor the proceedings closely and update you on our views should they evolve. Please feel free to share your opinions with us on this topic, we appreciate the debate. As one of the founding fathers of the USA, Benjamin Franklin, said, “If everyone is thinking alike, then no one is thinking.”

The Investment Office



Summary of Democratic Candidate Views on Key Issues

  Joseph Biden Bernie Sanders Pete Buttigieg Elizabeth Warren Michael Bloomberg
Wealth Tax Opposes,  but would increase income taxes Supports taxes on wealth and higher income taxes Opposes but would increase income taxes Supports taxes on wealth and higher income taxes Opposes,  but would increase income taxes
Corporate Taxes Raise rates, but keep them below pre-2017 rates Raise rates, eliminate tax breaks for profits earned overseas Reverse 2017 corporate tax cuts Raise rates to above pre-2017 rates Raise rates, but keep them below pre-2017 rates
Minimum Wage Raise to $15/hr Raise to $15/hr Raise to $15/hr Raise to $15/hr Raise to $15/hr
Infrastructure Increase infrastructure spending Increase infrastructure spending Increase infrastructure spending Increase infrastructure spending Increase infrastructure spending
Housing   Use rent control and taxes to curb speculation Construction funding and rent subsidies Provide Federal funds to build more housing Construction funding and rent subsidies
Competition & Antitrust More investigation is needed Break up large technology firms Empower regulators Break up large technology firms  
Bank Regulation   Separation of retail and investment banking   Separation of retail and investment banking Has been critical of government regulation of banks
Student Debt Expand or fix existing debt-relief programmes Cancel all student debt and make college free Cancel some student debt Cancel some student debt and make college free  
Reducing Emissions Tax carbon emissions Impose government regulations Tax carbon emissions Impose government regulations Impose government regulations
Oil and gas drilling End offshore drilling Ban fracking End offshore drilling Ban fracking End drilling on federal land
Gun Control Universal background checks Universal background checks Universal background checks, weapons registry programme Universal background checks, ban assault weapons Universal background checks, ban assault weapons
Medicare for all Opposes, but would expand coverage Supports Medicare for all Americans Opposes, but would expand coverage Supports Medicare for all Americans Opposes, but would expand coverage
Drug costs Link to overseas prices Import drugs from abroad and break patents if necessary Import drugs from abroad and break patents if necessary Government should manufacture drugs Link to overseas prices
Defence Increase defence budget Cut defence budget Increase defence budget Cut defence budget  
Overseas Troops Keep troops deployed Bring troops home Bring troops home Bring troops home  
Tariffs Don't use tariffs to pressure countries Use tariffs to penalise bad behaviour Don't use tariffs to pressure countries Use tariffs to penalise bad behaviour Has called Trump's trade policies disastrous


Primer on the Primaries
In the US, political parties do not select candidates for seats, as is custom in many European government systems. Instead, a “primary” election is held to select a candidate for each party. The rules vary by state; some allow anyone to vote in primary elections while others require you to be a member of the party to have a say. The winners of the primary elections go on to contest the general election.

The system for selecting Presidential candidates has its own peculiarities. First, there’s the order of voting. Primaries kick off with Iowa on the 3 February and end with Puerto Rico on 7 June. The results from early-voting states often have a large impact the race; good results bring media attention, campaign donations and momentum. Every Democratic winner of the Iowa caucus since 2000 has gone on to become the party’s nominee. If you don’t do well in the early primaries, then you need to get votes on Super Tuesday. This year it’s 3 March when 14 states will be holding primaries simultaneously. Those 14 states control 33% of the pledged delegates.

That brings us to delegates. The nominee isn’t selected based on who has the most votes. Each state allocates delegates based on your placement in that state’s primary election. Some delegates are allocated based on your state-wide vote totals, while others are based on results in specific districts. Candidates need at least 15% of the state-wide vote to receive state delegates and 15% in a specific district to receive district delegates. The number of delegates a state has to allocate is formula-based, and takes into account how many people in each state voted for the democratic candidate in the past three presidential elections. The delegates attend the Democratic Party Convention from 13 – 16 July 2020 to vote on the nominee.

Money is also important. It pays for staff, travel and advertising. In a crowded Democratic field, part of the battle is just being known by voters. In 2016, Hillary Clinton and Donald Trump raised a combined $1.65bn (US Federal Election Commission reports). According to the Center for Responsive Politics, the total cost across all Presidential, Senate and House races in 2016 was estimated to be $6.5bn, up from an estimated $3bn in 2000.

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