US elections: How will it impact the market?

Politics Sep 21, 2020 / Reading Time: 5 mins
MaqroSearch US elections Maqro Capital
By Cameron Gupta Reading Time: 5 mins

Since March, the stock market has been dramatically shaken by the effects of the COVID pandemic. At this point in time, investors have one more highly uncertain event to keep their eyes on; the 2020 US Presidential Election. Given the unprecedented effects that COVID has on markets, it’s quite difficult to predict what the outlook is or who will likely be the next US president, but looking back 90 years, we can identify patterns that have repeated themselves during election cycles.

Who is in the Lead? Biden or Trump?

There are less than 2 months left until the US presidential election and BBC polls show Joe Biden ahead at 51% and Donald Trump at only 43%. Although Biden is ahead of Trump in poll votes, history shows that polls leading up to elections are not always indicative of the successful candidate. Poll votes simply represent the popularity of candidacy. A good example of this is back in 2016 when Hillary Clinton won approximately 3 million votes more than Trump and was ahead in the polls leading up to the election but still ultimately lost. This is because the US uses an electoral college system, meaning that winning majority votes does not mean winning the election. Notably, this year is different due to the coronavirus pandemic, which is affecting both the economy and how people will be voting in November.

Maqro Capital US elections

Source: BBC News

Looking at elections back to 1932, nearly three-quarters of sitting presidents have been re-elected. Since then, an incumbent president has always won the re-election unless there was a recession in their time in office. It seems that history favours Biden, which can be backed up by Biden’s approval rating of 51%, which is higher than that of previous incumbent presidents’ ratings. Biden has also been ahead of Trump in most national polls since the start of 2020. He has been hovering around the 50% mark in the past few months and has even had a 10-point lead at one point.

Impact on the Markets

The impact on markets and the economy heavily depends on the ability of the president to deliver the promises that they set out in their campaign. Historically, the S&P500 typically sees higher volatility during election years than non-election years because investors would price in the policy effects of both candidates, depending on who is favoured. Markets have usually reacted more positively when the Republican party wins (in this case, Trump), as the policies of these parties are thought of as more market friendly. This is highly evident in Trump’s campaign where he promises corporate and income tax cuts, bringing jobs back to the US, and as promised in 2016, fixing the US trade deficit. Analysts have found that when a new party comes into power, the stock market gained an average of 5%. They also found that when the same president is re-elected, the equity market return was higher at an average of 6.5%.

National Investment Strategist, Tom Hainlin, noted that the healthcare sector usually shows high levels of volatility in the lead up to an election, which is largely explained by the differing views on health care plans. He anticipates that during the 2020 election, the energy sector will also face extended volatility due to Biden and Trump having opposing views on domestic energy production.

Four Possible Outcomes:

1. Trump Wins

The first scenario is if Trump is re-elected and Congress remains split between Republican and Democrat leadership. This scenario would favour smaller companies because Trump plans to roll back federal regulations on businesses, coupled with corporate and income tax cuts as well as increased support for domestic-made products. In 2016, when Trump first won the election, he pushed through corporate tax cuts and relaxed business regulation. Although investors expect the outcome to remain the same if Trump were re-elected, it is important to remember that the tensions with China, coupled with coronavirus impacts, could continue to pose challenges not just for the US, but for global markets. Ryan Detrick, Chief Investment Strategist of LPL Financial mentioned that Trump’s commitment to lower taxes and deregulation will be able to provide consistent, market-friendly policy environment. According to Forbes, analysts largely agree that if Trump wins, sectors such as defence, financials and tech all stand to benefit. CFRA has released data going back to 1944, revealing that when Republican presidents presiding over a split Congress results in stocks rallying 60% and the S&P500 gaining 5.3% in average.

2. Biden Wins

The next scenario is if Joe Biden wins and there is a Democratic sweep of Congress. In this case, the markets will most likely sell-off due to the tax and minimum wage proposals that is being pushed by Biden. Wealth manager, Hightower, sees a likely 2-5% sell-off in the US market if Biden wins. Research from CFRA showed that in the past 22 years when Democrats controlled the executive and legislative branches, the stock market rose an average of 9.8%, rallying 77% of the time after the election.

Biden has plans to raise taxes on companies, and given the current COVID situation, those levies will likely get deferred. However, it is important to be aware of possible vaccines coming through in the next few months which may see this proposal take effect. Biden has plans to invest $2T in clean energy in transportation, electricity and building sectors, which will likely trigger a sell-off in the broader sector since the proposal only helps niche companies. Infrastructure, clean energy, and health-care services would be poised to do well compared to pharmaceutical or big tech companies, who will likely take a hit due to increased government regulation.

3. Biden Wins, But Republicans Hold the Senate

The third scenario is if Biden wins and Congress stays split between Republican and Democrat control. Hightower says this would be the best-case scenario and the most market-friendly option. Below shows the different political scenarios and the historical average returns for S&P 500.

maqro capital us elections table

Source: Forbes

4. Delayed Election Results

This outcome is classified as the worst-case scenario for equity markets. This has happened before in 2000, when the election was not fully decided until 5 weeks after Americans cast their vote. During this time, the S&P500 dropped approximately 10% while the NASDAQ simultaneously plunged over 20%. This happened because the votes were so tight in Florida that the state initiated a recount. This option is on the table not because of a likelihood in recount, but a chance of delay due to the increase in in-mail ballots since COVID is keeping people from voting in-person.