US Elections – where are we and what’s next?

With just over two weeks to go, we explore voter intentions and expectations, how markets tend to perform after US elections, and the potential impact of each candidate’s policies on the economy and different industry sectors.

WHAT YOU NEED TO KNOW

• Polls and betting markets point to a potential ‘blue wave’, with Biden winning the presidency by a good margin and the Democrats taking back the Senate. Regardless of the result, analysis shows that financial market performance in the months following an election tends to be driven by the overall macro backdrop.
• Further out, rather than whether the next US president is going to be Trump or Biden, we think the implications for financial markets and the real economy will depend on whether the election delivers a divided or unified government. We expect extended legislative gridlocks if it’s divided and significant policy change if it’s unified.
• A unified Biden government would probably result in the largest net fiscal stimulus. Infrastructure, managed healthcare and sustainability themes should benefit, as well as relations with the EU (but not with China). However, tax hikes would probably hit corporate earnings. The yield curve could steepen, but moderately, as the Fed is likely to mitigate any pick-up in yields. Reform and regulation may negatively affect the pharmaceuticals, tech, energy and financials sectors. The US dollar is likely to weaken.
• A unified Trump government, which would surprise markets, would seek to boost US growth via tax cuts, along with further financial and energy sector deregulation. The net fiscal boost is likely to be a middle-ground one, and less than in a blue wave scenario. The yield curve could steepen, but marginally, also given the monetary policy set-up. Tensions with China, and perhaps with the EU too, would likely remain or even increase. The US dollar is likely to strengthen.
• One risk is that a contested outcome, the probability of which may rise if the result is very close or subject to recounts, may initially trigger a bout of risk-off sentiment. This could negatively affect many sectors and risk assets in general. It would likely result in a flatter yield curve and stronger US dollar on safe-haven demand. The medium-term impact would depend on the outcome of the dispute.

THE VOTERS: WHAT DO THEY PLAN AND EXPECT?

Biden leads Trump in the polls by a wide margin: about 10 percentage points nationally, though by a narrower margin in likely swing states. Popular polls-based statistical models, ranging from the Good Judgment Project’s Superforecasters to the US election prediction model built by The Economist, currently place Biden’s chances of winning the election at more than three out of four. However, these surveys of voter intentions could be affected by all sorts of biases – including a misrepresentation of the preferences which, anecdotally, appears to happen with non-mainstream candidates such as Trump. Notably, as we saw with the US election four years ago (and Brexit), they may not be very accurate.

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Authors

Daniele Antonucci
Chief Economist & Macro Strategist

Bill Street
Group Chief Investment Officer