US 2020 Election: Keep America Great or Build Back Better

4 min read 30 Sep 20

Summary: As the US presidential debates rumble on, voters and investors may not be too diverted. Certainly, though, who ends up in the White House come November, and the make-up of Congress, will impact market sentiment and determine the future direction of travel for the world’s largest economy. Associate Portfolio Manager, Randeep Somel takes a look at current polling and what’s at stake.

Rather than being informative, last night’s first US presidential debate mostly annoyed or simply entertained the US electorate according to snap post-debate polling[1].

Investors may not be too focused on the remaining round of debates but certainly which candidate is in the White House come November, and how Congress is divided up, will have an impact on market sentiment.

Biden on tax

The Democrats tend to be the party of higher tax and spending. To fund fiscal stimulus, proposed tax increases under Joe Biden would aim to raise ca. $3.2 trillion over ten years. The Democratic candidate would look to extend payroll taxes for social security, increase the top marginal income tax rate from 37% to 39.6%, and raise the corporate tax rate from 21% to 28%. While the latter would hit banks in particular, without capital expenditure and R&D spending to offset the hike, it remains lower than under Barack Obama’s presidency, which saw many US corporates park capital overseas to avoid higher domestic taxes.

Biden could also look to increase the federal minimum wage to $15 an hour. This should boost discretionary spending, but would be negative for small employers, and retailers; which have already been struggling during the coronavirus lockdowns.

Climate change and healthcare

The next President will ultimately decide the direction of travel for the world’s largest economy. President Donald Trump intends to remove the US as a signatory of the United Nations  Paris Agreement on climate change, while a Biden victory will almost certainly see the US remain a signatory and put in place a plan of achieving net zero emissions by 2050. Biden has announced a climate plan that would involve spending $2 trillion over four years to significantly increase the use of clean energy in the transportation, electricity and building sectors. The proposal is designed to create economic growth and strengthen infrastructure, whilst also tackling climate change.

Healthcare is another election battleground, particularly in the wake of the COVID-19 outbreak. Under Biden, policies to support wider access to healthcare, such as a refunding of Obamacare, are likely to be on the agenda. Trump, meanwhile, has also upped the rhetoric on drug pricing in the US, saying he will bring drug prices – which are generally higher in the US – down to international levels. While this may prompt some price volatility among healthcare stocks as we approach the election, the threat that could have been posed under a more radical Democratic president has passed.

‘Made in America’

Both Republicans and Democrats have been praising labour unions and backing proposals to bring production back to the US from abroad. The American Foundries Act 2020, for instance, has bi-partisan political backing aimed at boosting the domestic production of semiconductor chips. To win back blue-collar voters in swing states such as Pennsylvania, Ohio, Michigan and Wisconsin, the Democrats are now having to take a more hawkish tone on international trade.      

A ‘blue wave’ in 2020?

It is not just the presidential vote that matters in November’s election, but which party controls both houses of the legislature. The entire House of Representatives and also one-third of the US Senate are up for grabs. Currently, the Democrats control the lower house and the Republicans control the Senate. To successfully enact his legislative agenda, Biden would need both chambers of Congress to be majority Democrat.

The perils of ‘polling’

Although polling has consistently shown Biden ahead of Trump, it is worth remembering that nearly all polls predicted a Hillary Clinton victory in 2016. While pollsters purport to have adjusted for biases in sampling since the 2016 outcome, both the pandemic and civil unrest are likely to create unique challenges in 2020. Polling in key swing states still indicates a Biden victory, but is much closer than at a national level and, interestingly, Biden supporters are less confident that their candidate will win.

Enthusiasm is also important in elections

Polls also show fewer than a quarter of registered US voters feel enthusiastic about Biden[2], and even among his registered supporters, while he has broad support overall, fewer than half are ‘very’ enthusiastic about their presidential candidate. This could affect turnout numbers on polling day, especially as Donald Trump remains very popular with his base, with a comparative 65% of ‘very’ enthusiastic registered supporters[3].

It’s likely to be close

With President Trump’s rhetoric around widespread ‘mail-in’ voting fraud, come the election result he is not committing to a peaceful transition of power, saying that “we’re going to have to see what happens”.

If voting is too close to call in some of the swing states, nervousness will creep in as investors grapple with the resulting policy uncertainty. In the 2000 Bush-Gore race, a recount in Florida left the outcome in limbo for weeks. The S&P 500 Index fell ca 8% during the month of November. Al Gore won the popular ballot but was short on electoral-college votes on a preliminary count in Florida. The decision went to the Supreme Court, who voted in favour of George W. Bush, and Al Gore conceded by mid-December that year.

With the increase in ‘mail-in’ votes this year, which will take time to count, a repeat of the 2000 election is possible. The recent passing of Supreme Court justice Ruth Bader Ginsburg has emboldened activists on both sides of the political divide. While it looks as if Trump has enough Republicans on side to bring forward and pass a senate confirmation vote on his nominated candidate, Judge Amy Coney Barrett – should he not be successful, the stakes in the November election will be even higher.

If there are any indications of voter fraud, either candidate could refuse to accept the result and the election could be decided by the US Supreme Court, as it was in 2000. This will be highly politicised. While the inauguration of the next US president will not take place until 20 January 2021 (allowing time to resolve such issues) a disputed result would undoubtedly inject uncertainty into markets until there is a legitimate and official winner.




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