The 2020 US presidential election is a major landmark in the global financial landscape for this year and beyond. It is not just about the policies, but the actual process itself may have a bearing on financial markets way beyond anything we have seen in recent history.
Firstly to address the usual issue: does the US stock market fare better under a Republican or a Democrat president? Many view Republicans as the pro-business, small-government party compared to the tax-and-spend Democrats, and build that into a view that a Republican term would lead to a stronger stock market. The facts do not back this up, however. Over both a longer and medium-term basis, stock prices have gone up more during a Democrat presidential term than a Republican one, on average between 4 and 5 per cent more.
Over the last 45 years, US stocks performed best during Bill Clinton’s first term. George W Bush presided over the worst term, but to be fair this did overlap with the worst financial crisis since the Great Depression. The “colour” of the White House does not matter as much as some think. Other factors, beyond politics –interest rates, inflation, earnings growth, etc – usually play a greater role in financial markets. Stock markets are not very good at pricing political risk, and it is this uncertainty which, at certain times, assumes the key role.
There are clear policy differences between the two candidates, though details on President Trump’s programme can be harder to unearth. The political programmes have both overall market and individual sector implications.
The overarching theme in the Joe Biden proposals is an increase in taxes together with a substantial package of government spending. Democrat policy would see the corporate tax rate move from 21 to 28 per cent, with some increase in personal tax rates aimed mainly at the better off. On personal taxes, the top 1 per cent would pay 75 per cent of the increases.
Clearly changes in corporate taxes can have a direct impact on company profits and on stock prices. We saw this with the Trump tax cuts. We should expect any Biden tax increase to be phased in slowly, however, and perhaps to a lower end point. There will be no tax shock to the US economy in the midst of a pandemic and economic downturn. This lighter hand on the taxation tiller should lessen its near-term market impact.
Off-setting any tax drag is Biden’s proposed stimulus package of at least $2 trillion which, if fully implemented, could add two to three percentage points to US economic growth, and just over half of a per cent to eurozone growth. While we are likely to see some stimulus from the Republicans also, it will not match the potential of the Democrats’ proposals. Ultimately stimulus would be a market positive.
A major policy difference between the two candidates is energy. Trump has always had a leaning towards fossil fuels and a sceptical view on climate change. Biden has put the green agenda front and centre of his proposals. His spending plans have a clear environmental backbone. He may limit future fracking, though not to the extent that the Republican narrative has it. Rather than an outright ban on fracking as Trump has alleged is the Democratic candidate’s plan, Biden has simply said that there will no more licences issued on government lands.
Thus, a Biden victory should be a positive in general for the alternative energy sector. We have to acknowledge that the renewable energy sector in the stock market has already risen about 70 per cent so far this year. Clearly a Trump victory, at least in the short term, would see a reversal of these stock moves.
Another sector which has always been caught up in the ebb and flow of US elections is the pharmaceutical industry. This time the Democrats are looking to cap prices and give greater negotiating power to medicare on drug programmes. While this seems to have been an ever-present agenda item in US politics, interestingly “big pharma” has rarely had a bad election. In six out of the past seven US elections, even if initially under pressure, the sector has out-performed within a short space of time. It took a little longer after 1992 as Hilary Clinton led the presidential task force on healthcare reform, which ultimately failed in late 1994.
Regarding impacts at sector level, the moves may not be that dramatic as a lot of stock prices have moved already. Issues such as Biden’s tax policy may be diluted and dragged out, as there is no appetite for higher taxes in a still recovering economy. Investors must also pay heed to any gains by the Democrats in the Senate. If the Senate changes hands, it provides a greater impetus to the implementation of Democrat policies, even without the magic “super majority” of 60 seats being achieved.
This election outcome will also have a bearing far beyond Wall Street on global stock markets and volatility. It’s almost hard to recall now, but before Covid one of the greatest sources of volatility in global financial markets was US-China trade policy. Trump’s tariff tweets, with threats and deadlines, were constantly driving markets in one direction or the other.
While we won’t see a broad reversal of policy here if Biden wins, we are likely to see a change of language and process. There is still a strong constituency within the Democrat party for a tough stance on China – according to Pew research 59 per cent of Democrat voters have an unfavourable view on China. The corresponding number for Republican voters is 70 per cent. Trade would continue to dominate US-China relations but intellectual property and human rights would also be part of the agenda.
In fact a Biden win will see a significant reset of US foreign policy towards greater engagement on issues such as climate change, European defence and the Middle East.
Apart from the role that differing policies may play, the actual election process could have market impacts. What could be very nerve-wracking for the stock market is the risk of a contested result that is prolonged and nasty. How might Wall Street react?
Some point to the Florida stand-off and recount of 2000 as an example of how resilient the market and how robust the institutional infrastructure can be. Over the period of uncertainty from November to December, the S&P 500 was down by just over 4 per cent — hardly noticeable in a market in the midst of the bursting dot-com bubble.
In 2000 it was fought out mainly by teams of lawyers and the Supreme Court. But this is not the America of 2000.
There has been an erosion of the accepted norms of political and civil behaviour. A drawn-out and contested close outcome could see mass protests, mobilised militia, city lockdowns, etc. This could be akin to what we saw in Mexico City following the disputed (and very close) 2006 election with street protests and occupation.
In the past, investors could almost look through US presidential elections as the hue of the party in charge was important but not going to be the only driver of economic growth and company profits. This year, as well as the US economy and policy, effectively global trade, global healthcare, climate change, etc, are also on the ballot paper.
And there is the new and added risk around the acceptance of the result. From an investor point of view, the 2020 election is different. This election matters.
Eugene Kiernan is an independent investment strategist and is president of the Chartered Institute for Securities and Investment