The implications of US election outcomes for investors

Does US President Donald Trump still have a chance to win the election? Yes, absolutely, albeit a small chance.

The US presidential election poll in 2020 mimics that of 2016’s timeline almost exactly.

In this election year, President Trump’s mishandling of COVID-19 and the Black Lives Matter movement means the opportunity to sway voters will be much harder this time around. What’s more, he has undermined the election process by threatening to not accept the outcome, to elongate the vote-counting process and to reduce funding to the postal office – all of which continue to erode his leadership quality.

Apart from failing on social and leadership scores, President Trump has the perfect score on the sharemarket. The sharemarket has gained about 60 per cent during his term. Since 1928, the three-month equity performance before the election predicted 20 out of 23 elections for the winning party.

The three exceptions have been when President Dwight D. Eisenhower retained his seat, when President Richard Nixon took over from President Lyndon B. Johnson’s second term, and when President Barack Obama retained his seat.

The must-watch Presidential debates

Absentee ballots have been mailed out as early as September 4 in North Carolina. Valid ballots will be required to be posted as late as November 3 in California. Absentee ballots come into focus this year in the current pandemic environment as it may be the preferred method of voting.

So, any time from now until the election day on November 3, voters can cast their ballots. The presidential debates will happen on September 29, and October 15 and 22. This will be President Trump’s last chance to convince voters of Joe Biden’s unsuitability.

Overall, expect prolonged uncertainties beyond November 3 to allow for the time it will take to count and recount the ballots. What happened in the Iowa caucuses (the revelation of data inconsistencies) can happen on election day. The Iowa caucuses changed the vote-counting method from traditional to digital via an app. Many older delegates simply did not know how to use the app; therefore, Biden did not win the Iowa caucuses.

What does Kamala Harris represent?

Senator Kamala Harris is the American dream story. With her training as a prosecutor, she will be a formidable opponent against Mike Pence in the vice-presidential debate. Harris can help Biden win and she can help him govern.

So far, Senator Harris is seen as a moderate political pragmatist.

Typically, the sharemarket starts to price in volatility for the US election risk in September. There is a chance that the sharemarket would not react as strongly to the Biden/Harris ticket, compared to a Biden/Senator Elizabeth Warren ticket, as anti-regulation would have been front and centre of the agenda.

Further down the road, some mild volatility may occur from profit-taking, in an equity market that is at an all-time high, if Biden nominates Warren as the US Treasury secretary.

Biden’s economic policy is an olive branch to progressive voters who supported Bernie Sanders since 2016, but it is not as progressive as Sanders’ policy. Fiscal spending, whether on climate change or the pandemic program, will be unleashed under a Democratic sweep.

The two progressive elements of Biden’s policies are higher corporate and wealth tax and tighter regulations. All the ameliorating arguments that these policies will not rock the sharemarket right away are placed on the trust that Biden will do the right thing, which is to not implement them right away until the US economic recovery is solid.

Odds of a Democratic sweep

A Democratic sweep will occur if they take control of the Presidency, the Senate and the House, which they already won during the mid-term election. Winning the Senate is key because the Congress controls the purse strings.

Of the 30 presidential elections since 1900, each time the Democrats won the presidency from an incumbent Republican they also took control of both the Senate and the House.

Financial market reactions after a Democratic sweep are mixed in equity markets. Sharemarkets can be up or down, within three to six months afterwards, averaging around a 3 per cent movement, which is not too far from a daily or a weekly movement. However, bond markets always rally after a Democratic Sweep, with 10-year US Treasury yields falling 35 basis points on average.

One caveat to the bond market reaction is that the Democratic sweeps typically occurred around crisis years: 1912, 1932, 1960, 1976, 1992, and finally 2008. If the American voters are prescient, what does 2021 have in store for the global economy?

Kate Samranvedhya is the deputy chief investment officer and Ben Wang is the assistant portfolio manager at Jamieson Coote Bonds.