The US election runup has begun in earnest. With the Democrat and Republican conventions behind us, the presidential debates coming up, and less than two months to go until voters cast their ballots, investors around the world are increasingly asking how this momentous event may affect the economy and markets. Here are some of our latest thoughts, including how investors might position for November and beyond.
Sizing up the presidential race
Based on the latest polling (which isn’t foolproof), Trump is trailing Biden in the national polls by around eight percentage points and by an average of five points in key swing states like Florida, Pennsylvania, Michigan, and Wisconsin. With his stable polling numbers and favorability ratings, as well as relatively few undecided voters at this stage, Biden is narrowly favored to win both the popular vote and the electoral college, but we expect the polls to tighten going forward given the speed and emotional intensity of current events, along with the upcoming debates.
Investors should be thinking about three potential scenarios: 1) Trump wins; 2) Biden wins with split Congress; and 3) Biden wins with Senate control flipping to the Democrats (the so-called “blue wave”).
Economic and market implications
There are pluses and minuses to each of the scenarios described above. Here’s how we’d summarize the potential outcomes:
Risks the market isn’t focused on
The biggest risk, in our view, is the enormous expected increase in mail-in ballots due to COVID-19, the challenge of processing them all by the deadline, and the potential for the results to be contested in a close election. This could take months to sort out, leading to a heightened period of uncertainty without a strong legal precedent for resolution.
Another risk is that, in a blue wave scenario, the Senate filibuster1 could be removed. That would reduce the need for bipartisan compromise and potentially pave the way for a more progressive legislative agenda to be passed into law.
Finally, the market hasn’t yet focused on Biden’s potential Cabinet selections should he win. He would be likely to choose Senator Elizabeth Warren for a high-profile Cabinet post (perhaps Treasury secretary), which markets would probably dislike given her support for tougher regulation of the financial sector.
Potential winners and losers
Here are our thoughts from an investment sector standpoint:
- Even more important to markets than who becomes the next US president will be whether Democrats can “flip” the Senate if Biden wins. A blue wave is the worst-case scenario for risk assets, in our view. On the other hand, additional fiscal stimulus might get through Congress more easily following such an outcome.
- The market seems less focused on the attendant risks of this election cycle. These include the election process itself and any potential irregularities or delays, as well as the risk of Senator Warren becoming Treasury secretary with a Biden victory.
- The market’s election-related moves are still likely to be secondary to other catalysts, including COVID-19 developments and fiscal/monetary policy. Substantial liquidity (as evidenced by cash on the sidelines), ongoing support from the US Federal Reserve, and fiscal stimulus (as long as it doesn’t fade) should remain key tailwinds for the market.
1The legislative filibuster is a Senate rule that requires most bills to meet a higher threshold of 60 votes out of 100 to pass (rather than a simple majority), better enabling the minority party to block bills that it opposes.