US Elections: COVID-19, Policies and Markets

The Political Event of the Year 2020

The most-waited political event of the year is fast approaching: the US elections will take place on the 3^rd of November. The nominees of the two main political parties – Republican and Democratic party are yet to be announced at the Presidential Nominating Convention. However, the clear frontrunners are President Trump and Joe Biden. Without any doubt, this election will be widely monitored as US politics may affect the global economy, alliances and trade agreements.

Markets were rattled by the long-drawn trade war between the world’s two powerful economies. Even though we kick-started 2020 with positive trade negotiations, the tussle between the US and China over the transparency of the coronavirus outbreak worsen the already fragile relationship. Ahead of the Presidential election, investors are bracing for the tensions between the US and China to get worse as it is a politically-motivated move by President Trump to win another term. Rightly so, the recent new tech war between the two countries are keeping the markets on edge.

The COVID-19 Effect

In modern times, history has shown that an incumbent President has a clear advantage and usually wins re-election. The last president to lose re-election was George W Bush which was mostly due to an economic recession. Therefore, in recent history, an incumbent President has never failed to win a second term unless a recession has occurred during their time as president. At the beginning of the year, the odds of President Trump winning the election was high.

US-China Tensions & COVID-19

The Trump administration had a tough stance against China which had bode well with a majority of Americans. As per Pew Research Center:

• 73% of US Adults say they have an unfavourable view of China.

• Around two-thirds of Americans (64%) say China has done a bad job dealing with the coronavirus outbreak.
• Around three-quarters (78%) place a great deal or fair amount of the blame for the global spread of the coronavirus on the Chinese government’s initial handling of the COVID-19 outbreak in Wuhan.

However, as the virus continues to spread across the globe, the US recorded around 5.3 million of coronavirus cases with more than 165,000 deaths. The US was hit the hardest by the pandemic and the handling of the outbreak by the Trump administration was questioned. The President has failed to timely respond to the crisis, is also being blamed for sidelining the advice of the experts and played down the severity of the coronavirus crisis.

Strong US economy

Heading into the election year, the US President was confident that its hard stance on China and a thriving US economy with a historically strong labour market and greater economic security will be the focal points of his election campaign. However, the US economy contracted due to the various forms of lockdown amid the pandemic. The preliminary Q2 GDP figures show that the US is poised to shrink by a 32.9% – the deepest decline in decades. The pandemic continues to wreak havoc across the globe and the outlook for the third quarter remains murky.

COVID-19 Changed the Odds

As per the latest polls, the odds have changed – the battleground states look good for Joe Biden. The presumptive Democratic nominee even has big leads over states like Michigan, Pennsylvania and Wisconsin where the Republicans won by margins of less than 1% in the last election:

The most recent data suggest that even Republicans supporters are questioning its response to the coronavirus pandemic. COVID-19 is unlikely to fade away by the election date and combined with the uncertainty about the state of the US economy – the current polls show that Joe Biden is running well ahead of President Trump.

Republicans and Democrats: Policies and Markets

Under any presidential campaign, tax policies are the primary factor for the markets because of its direct impact on corporate valuation. The Republicans are supposedly considered as more “market-friendly” compared to Democrats.

Cutting Taxes vs Raising Taxes

In simpler words, the Republicans encourage tax cuts and believe in an income tax system that does not unfairly target those who create jobs and wealth while Democrats support a more progressive tax structure to provide more services and reduce economic inequality by making sure that the wealthiest Americans pay the highest amount in taxes. After the 2016 election, markets rallied on the assumption of promises of tax cuts and faster economic growth. However, the trade war has created an uncertain environment for investors and the economy did not progress in the way expected.

For Joe Biden to see through this agenda, he plans to make new, bold investments and speed up the timetable for many of the 10-year investments he has already announced.  He will pay for the ongoing costs of the plan by reversing some of Trump’s tax cuts for corporations and imposing common-sense tax reforms that finally make sure the wealthiest Americans pay their fair share.

Stock Market Performance by President

The below interactive chart shows the percentage gain in the Dow Jones Industrial Average by Presidential term. Despite the pro-business policies, the Dow performed better under Barack Obama over the same time frame as compared to President Trump. Generally, a Democratic win means higher taxes which will negatively affect corporate valuation and the stock market. However, we have seen that there are higher market returns under Democrats as both the combination of higher taxes and government spending stimulate the economy and support the markets.

Source: MacroTrends

The Need for More Fiscal Stimulus

In a pandemic-induced environment, markets are in a need of more fiscal support from the government. The Fed Chair Jerome Powell has also emphasised on the importance of fiscal stimulus to support the economy. The Democrats seem to be in favour of more government spending than the Republicans.

A Democratic Sweep – Bad for Markets?

Leading up to the election date, volatility may be high but markets will eventually adjust to either the Republicans or Democrats policy changes. Investment opportunities will arise irrespective of a Democratic or Republican win. Some investors may concentrate on certain industries or sectors that can be impacted as the opposing views of both parties on renewable energy, climate, trade policies and health care could affect stocks related to those industries.  But most importantly, this election will be geared towards finding a government that will fight the pandemic more effectively and also eased trade tensions with key allies.

A democratic sweep may not be as disastrous as investors fret as historically stocks did also well under the Democrats and in some cases even better than under the Republicans.