US election: All eyes on November

With the US election fast approaching, we assess the potential implications for markets.

• If Democratic leader Joe Biden wins, it could be viewed by some as a vote for a bridge to a potentially more radical Democratic Party in four years’ time.
• A Democratic victory could see a potential reversal of some of the ‘America first’ foreign policies pursued by President Trump.
• A Republican Party ‘red clean sweep’ would be widely viewed by markets as a continuation of ‘business-friendly’ policies.
• Democratic pledges on social and health-care changes could be difficult to deliver, given the currently challenging government financial predicament.

November’s US presidential election is an unusual one for a number of reasons, not least because it will be conducted almost entirely virtually as the pandemic lingers. It also represents a very significant moment for the country after what has been a sustained period of controversy in the political arena.

If the country elects Democratic leader Joe Biden, it seems likely at this stage that it will be a one-term presidency, and in a sense it could be viewed by some as a vote towards a bridge to a potentially more radical Democratic Party in four years’ time.

Fork in the road for foreign policy?

If the Democrats do win, it is possible that we might see a general move back towards a more globalised US than we have seen over the last four years, and a potential reversal of some of the ‘America first’ foreign policies pursued by President Trump. However, while the election choice might seem like a fork in the road for foreign policy, it is by no means certain that a victorious Biden would jettison them all. Indeed, he may retain some of them, especially those concerning China, as anti-China sentiment in the US appears to have a strong groundswell of support within the broader electorate.

In terms of markets, its seems likely that, overall, the preference will be for a Trump victory, as a Republican Party ‘red clean sweep’ would be widely viewed as a continuation of ‘business-friendly’ policies. It may also lead to a further ratcheting up of anti-China policy.

A ‘blue clean sweep’ – victory for Biden and a Democratic House of Representatives and Senate – is likely to be viewed by markets as the least positive outcome, as it would make it more straightforward for the Democrats to pass potentially costly welfare legislation and potentially revisit the Trump administration’s tax cuts.

Satisfying social policy demands

If Biden comes out on top, it will be a tough challenge for his party to satisfy its political base for new social policies, given the US’s poor governmental financial position on account of its efforts to tackle the pandemic. Higher taxation or further increases in government spending could cause headaches for the Democrats – the forthcoming four years will be very difficult regardless of who wins – and what has been pledged by the party in terms of social and health care may prove hugely challenging to actually deliver.

The market is also likely to be concerned about the impact of a Democratic clean sweep on the pricing of drugs, and the health-care sector could come under pressure as the party is likely once again to campaign to reduce the price of drugs just as it has done regularly since Hillary Clinton first began to lobby for it in the 1990s. There may also be a renewed critical focus on big tech’s domination in retail, but neither Trump nor Biden may want to be too confrontational here given that online shopping has benefited so many people through the lockdown and beyond.

We have been watching developments very carefully, but given the vagaries of the US electoral system, where a small number of swing states could hold the key to which side wins, we think it prudent not to make any meaningful related changes to our portfolios at this time. It is quite feasible that Trump could be victorious once again with a lesser percentage of the vote, and while there has been a higher swell of support for Biden overall so far, in the last few weeks this has narrowed. There remains strong potential for it to move round again.

Pandemic to play a key role in outcome?

Covid-19 is likely to play a key role in determining the degree of Trump’s success. If there is a notable improvement in the economic backdrop going into the election, he will be quick to claim it as his own, although the data so far has not been uniformly positive and has stalled of late.

Another issue concerns Biden’s mental and physical stamina. Questions have been raised over his mental fortitude, and there have been moments during the campaign where he has appeared confused. Some Americans may think twice about supporting him if they perceive him to be incapable of fulfilling his presidential duties.

Lack of detail

There has also been a noticeable lack of detail around Biden’s policy proposals which he will have to address over the next six weeks. The Trump campaign will try to leverage both this and his mental aptitude, but will be wary of alienating some within the older population. Meanwhile, Trump’s frequent and often controversial commentary on social media will continue to give his opponents plenty of opportunities to be critical.

If Trump’s nomination of Amy Coney Barrett to the Supreme Court is approved by the US Senate on 3 November, the balance will shift 6-3 towards a more conservative court ahead of the election, and it may embolden Trump to challenge the election outcome should he lose. Such a scenario would produce a period of political instability which could be very unsettling for financial markets.

Brexit uncertainty

The outcome of the election could also have a secondary impact. This would be on the UK’s continuing Brexit negotiations by influencing any potential future trade deal between it and the US. While Trump has not expressed a strong view on the controversial Internal Markets Bill concerning Northern Ireland, the Democrats have a considerable Irish supporter base in some of the larger Democratic-voting cities, and both House speaker Nancy Pelosi and Joe Biden have voiced their strong opposition to any changes in UK policy that could threaten the Good Friday Agreement.

Authors

Paul Markham

Head of Global Opportunities