WHAT YOU NEED TO KNOW
- While political uncertainty matters in the short term, we believe that the longer-term drivers of equity markets are the economic outlook and company fundamentals.
- A unified government – whereby the same party controls the White House and both chambers of Congress – is likely to trigger a more significant market reaction, given the potential for more significant legislative changes.
- If Donald Trump is re-elected, the initial reaction is likely to be more market friendly, as he is likely to keep corporate taxes low and continue or reduce current regulatory policies for businesses.
- A Biden victory would probably lead to higher corporate taxes, long-term pressure on large fossil fuel energy players – with renewables and electric vehicles the likely winners – and perhaps increased drug pricing pressure for pharmaceutical companies.
- The most market-friendly outcome is probably one where neither party has complete control because the level of change is likely to be lower. Predicting the market’s reaction to this US election result is challenging and prices could change rapidly, meaning there is likely to be some short-term volatility ahead.
A LOOK THROUGH HISTORY
When considering the upcoming US election, we think it is worth noting a few general observations from previous ones. They are binary events and notoriously difficult to predict, as relatively small shifts in voter decisions within swing constituencies can significantly impact the outcome at the national level. This is partly why national polls are often unreliable when it comes to predicting the result. Previous election years in the US have been positive for equity markets but conditions have been more volatile due to elevated political risk. Over the longer term, the economic outlook and company profit forecasts are more important to markets. They are discounting mechanisms and market participants are anticipating the potential outcomes. So any significant political risk will be partly reflected in equity prices, which will then adjust rapidly when the result is announced. If the outcome is inconclusive, there is likely to be an extended period of uncertainty.
Authors
Daniele Antonucci
Chief Economist & Macro Strategist
James Purcell
Group Head of ESG, Sustainable and Impact Investing
Bill Street
Group Chief Investment Officer