The US election 2020 is a few weeks away and some investors are beginning to wonder if they should be making changes to their portfolio and how they should react if either candidate wins.
In this post we look at what a victory for each candidate may mean for markets and why stock trading before or immediately after the US election 2020 may not be a good idea.
- Where does the US election 2020 race stand now?
- Key issues for investors
- Which political party is better for the market?
- Comparing Biden and Trump’s policies ahead of the US election 2020
- Potential implications under four US election 2020 scenarios
- External factors to consider
- How to position a portfolio ahead of the US election 2020
Where does the US election 2020 race stand now?
For much of the last year, polls have suggested a very tight race between President Trump and former Vice President Joe Biden. Although Biden was slightly ahead until recently, his edge was well within the margin of error. The situation was similar in 2016, when it was widely assumed that Hilary Clinton would soon be (back) in the White House. Ultimately, in what many regard as a black swan event, Donald Trump won enough electoral college to win the presidency. For this reason, polls suggesting Biden would win have been treated with skepticism.
However, in the wake of several events over the last few weeks, Biden’s lead has widened significantly. Firstly, on 27th September, there was the New York Times report on President Trump’s taxes. Two days later, the President’s performance at the first debate was widely criticized. And, just days later, Trump tested positive for Covid-19 after hosting an event where many people were seen without masks.
Between September 27th and October 11th, Biden’s lead in national polls widened from 7 to nearly 10 points. This is the average according to Real Clear Politics, but some polls have Biden’s lead as high as 16 points. Perhaps more importantly, state polling suggests Joe Biden and Kamala Harris are leading by at least three points in five out of six battleground states.
Investors now appear to be trusting the polls. A month ago, investor surveys suggested Biden was a slight favorite amongst investors. The same surveys now have Biden as the probable winner. The Economist now gives Biden a 9 in 10 chance of winning. While investors have become more certain that Biden will win the US election 2020, they also see a contested election as a likely outcome.
Key issues for investors
The fact that Biden is widely regarded as the favorite to win the US election 2020, is only one factor to consider. The biggest market moves occur when reality doesn’t match expectations. If Biden is a clear favorite, then we should assume investors are already, at least to some extent, positioning themselves for a Biden win.
Some TV pundits have regarded Biden’s poll numbers as warning signs for the economy and the market. For what it’s worth, the S&P 500 has gained while Biden’s lead has grown over the past few weeks. This may partly be a case of mean reversion after a 10 percent correction. But it certainly doesn’t suggest investors are concerned about a Biden win. Markets don’t like uncertainty, which may result from two scenarios.
Firstly, a contested election is likely to result in more uncertainty than the ultimate result. Secondly, a Democratic sweep may also result in more uncertainty. If Biden wins, but Republicans keep control of the Senate, they will likely block many of his policies. That would mean less would change, giving investors more certainty about the future.
On the other hand, a Democrat sweep would allow Biden to do more – but exactly what and when will only become clear later. It’s also worth remembering that the stock market is not the same as the economy, and elections have more to do with the economy than the stock market.
Which political party is better for the market?
Many of Biden’s critics have stated that he will raise taxes and there will be a stock market crash or another bear market and recession. This is something that happens frequently ahead of an election. The reality is that market performance has been similar regardless of whether there is a Republican or a Democrat in the White House.
In fact, the stock market has performed slightly better under Democrat presidents – though that may have more to do with the state of the economy when Democrats are often elected. In several instances Democrats have been elected after a recession, giving them a lower base to work from. The bottom line is that there isn’t really any empirical evidence to suggest that Democratic presidents are on average worse for the market. As to whether higher taxes will hurt the market or economy – that depends on how effectively the money is spent.
Comparing Biden and Trump’s policies ahead of the US election 2020
The 2020 election has become a referendum on President Trump, and in particular his handling of the Coronavirus pandemic. This has meant that there has been little focus on each candidate’s policies. In fact, both candidates have been deliberately vague about certain policy elements. However, both candidates have published some policy documents, even if they are light on detail.
In addition, the attitudes of both candidates toward subjects like tax, healthcare and trade are well known. Trump tends to view the economy through the lens of the New York Stock Exchange. Biden points out that US citizens are not all stock investors and wants an economy that works for everyone. The following are the key areas with regard to the economy and the stock market:
Tax is one of the areas where Trump and Biden have starkly different agendas. Trump has already cut taxes, and he has stated his intention to make those tax cuts permanent. His promise is that lower taxes and less regulation will result in higher economic growth, which will improve everyone’s lives.
Biden on the other hand plans to increase taxes – but mainly for wealthy individuals and corporations. Along with higher taxes will come more expansionary fiscal policy. However, it would take some time before there is clarity on what he will actually be able to do. When Trump cut corporate taxes, corporations did increase capital expenditure and R&D investment – but the largest investments were in share buybacks. This was obviously good for investors and the trend may continue if Trump is re-elected.
Trump has always been adamant that he will repeal and replace Obama Care. While he says he will replace it with a better plan, he has never actually published a replacement plan. Trump’s budget also proposes cuts to Medicare and Medicaid. While trump has signed an executive order aimed at reducing the price of prescription drugs, the order is likely to face a legal battle.
Biden wants to create a public insurance option. He also promises to invest more immediately in fighting the Coronavirus pandemic. Some analysts believe a Trump victory may favor drug makers and insurers, while a Biden victory would benefit equipment makers and biotech stocks.
Another area where Biden and Trump have vastly different ideas is Energy – particularly in the context of climate change. Trump is a champion of the fossil fuel industry and has little interest in renewable energy. Biden wants to tackle climate change by making the transition to renewable energy a driver of growth and job creation. He also wants to get subsidies to the fossil fuel industry banned around the world.
The two candidate’s plans probably couldn’t be further apart. If Trump wins there will be little change from the last few years. If Biden wins there may eventually be big changes across the board for the energy industry. However, Biden’s energy program is tied in with his ideas for tax and infrastructure development, which will take time to implement. He will have to reach agreements with both the House and Senate. This will be difficult if the GOP controls the Senate – but he may even face hurdles with his own party.
The bottom line is that if Biden wins, there won’t be any major changes for some time. Also, it’s worth remembering that lower investment in oil, gas and coal will eventually lead to higher prices for those commodities. If anything, we will see a diversion between well capitalized producers and those that are already struggling.
Both parties are concerned by the defacto monopolies that companies like Facebook, Alphabet and Amazon have created for themselves. There may also be moves to regulate social media platforms. These topics will be on the agenda regardless of who wins in November. The reality is that antitrust legislation takes years to enact. The government is likely to face years of court cases. Also, in the case of Alphabet and Amazon, some investors believe value will be unlocked if they are broken up.
Both candidates have pledged to invest over $1 trillion in infrastructure over the next ten years. Trump made this pledge in 2016 and has so far failed to reach an agreement with Congress. Both parties are keen to invest in infrastructure – but disagree on what the money will be spent on. Democrats want infrastructure investment to include plans to reduce the country’s carbon footprint.
A clean sweep for either party would benefit infrastructure related investment – construction, telecom, and steel companies. A Democrat would benefit those industries as well as renewable energy companies. If the White House and Senate go to different parties, a deal may still be reached, but it would take time.
Trump’s hostility toward trade partners has been something neither party has traditionally favored. The trade war with China is still not over. A Trump victory would mean uncertainty over trade would persist. If Biden wins, he will want to mend America’s relationships with historical allies and trade partners. But although he doesn’t favor tariffs, his stance is not entirely in favor of free trade.
He has said that companies that move jobs offshore should be penalized in some way. He also wants to form a coalition with allies to tackle the issue of China and intellectual property. So, China’s Tech Giants will not necessarily benefit from a Biden victory. A Biden victory would initially be viewed as positive for global trade and especially for emerging markets. However, it may take time for order to be restored to global trading relationships.
Potential implications under four US election 2020 scenarios
Really there are six potential scenarios, but for the purposes of this analysis we will assume that the Democratic Party will retain control of the House of Representatives. This leaves the following four scenarios:
- Trump is re-elected and Republicans keep control of the Senate
- Biden is elected President and Republicans keep the Senate
- Biden is elected President and Democrats take control of the Senate
- Trump is re-elected and Democrats win control of the Senate
Trump is re-elected and Republicans keep control of the Senate
As things stand this would be a surprise result – but would also mean that things stay as they are. Investors who have positioned themselves for a Biden victory may find themselves unwinding positions which would create volatility. This result would be a disappointment for emerging markets, renewable energy, and biotech. It may also delay the next round of stimulus which would weigh on the market.
Biden is elected President and Republicans keep the Senate
Current polls suggest this is the second most likely scenario. It would also create the least uncertainty for markets as Biden would face resistance implementing his agenda. That would mean change would come very slowly, and markets would have time to digest any news. This scenario would probably be good for trade, the global economy, and emerging markets as US hostility to China would soften.
Biden is elected President and Democrats take control of the Senate
This result is more or less what the market is expecting and would give Biden the best chance of enacting his agenda. In the short term there may be a relief rally – especially if the result is not contested. It would probably be good for global markets and the global economy as the US would be expected to return to a more predictable state.
In the medium term, it will take some time for Biden to communicate his intentions and plans. This will probably generate uncertainty and volatility over the next year. This may however create opportunities for stock picking as a new market regime emerges. Some analysts have suggested that while US markets rebalance, stocks in Europe will benefit.
Trump is re-elected and Democrats win control of the Senate
This is probably the least likely of the four scenarios – but possibly the worst for markets. If Democrats controlled both the House and Senate, they would block much of Trump’s agenda. They may also try impeaching Trump again. Either way, a lot of uncertainty would result. This scenario may not actually have much effect on the economy – but would likely result in market volatility.
External factors to consider
One common bias recognized by the field of behavioral finance is the narrative fallacy. This occurs when investors buy into a story regarding a stock or sector regardless of irrational valuations. In the case of the US election 2020, there is a real risk of viewing investments from the respective of the election, while ignoring other factors.
The US economy, and indeed the global economy, often performs best when recovering from a deep recession. In the US, initial jobless claims have steadily fallen since March. The US housing market is already recovering with housing starts far higher than they have been for most of the last decade. Progress with a coronavirus vaccine is inevitable and will result in growing investor confidence on Wall Street. A global economic recovery is likely and will continue regardless of who wins the election.
At the same time, tech stocks that have led the rally over the last year are at record valuations. Whether those valuations are too high or not has little to do with who is president. They were high when Barack Obama was president, and they are even higher now.
The growth of the digital economy has accelerated certain trends, like remote working and distance learning, and may even change the ways cities operate. So, although valuations are high – there may be justification if digital trends continue. It’s also worth remembering Presidents and congress have little influence over interest rates. The government does not have the final say on everything.
How to position a portfolio ahead of the US election 2020
Market timing based on predictions about the election is a very risky idea. The outcome of the election is anything but certain, and the effect of the outcome on markets is also uncertain. A portfolio should generally be positioned so that it can weather a range of market conditions and events. That said, a knee jerk reaction in the days and weeks following the election will probably become an over-reaction as fear & greed play their part.
Extreme moves to the upside or downside may offer an opportunity to reduce or increase exposure at favorable levels. As we have mentioned often, the most reliable method of portfolio hedging is diversification and asset allocation. That means allocating a portfolio to several asset classes including equities, bonds, hedge funds and possibly real estate, commodities, and private equity.
The case for investing in gold for the long term is open to debate. However, a modest gold investment could be beneficial to a portfolio over the next few months. Firstly, gold is usually a good way to reduce portfolio risk and volatility. And, secondly, the gold price is already in a strong uptrend, while the USD has weakened over the last few months and may weaken further.
Conclusion – US election 2020
Trump’s election in 2016 resulted in record derivative volumes trading on the CME (Chicago Mercantile Exchange), but ultimately there was little change in the overall performance of the economy or stock market. The worst performing sector in the immediate aftermath was tech stocks with a lot of traders short selling the sector. With the benefit of hindsight that turned out to be a terrible idea.
Whatever happens in the US election 2020, there may be quite a bit of volatility, but there will probably be little reason for investors to react. However, if Joe Biden wins, investors will need to reassess their portfolios over the course of 2021 as the investing landscape may begin to change.