With just over 100 days to go to the US presidential election in November, the race for the White House is approaching the final straight.
Although support for Democratic challenger, Joe Biden, has surged in the last month, seemingly due to the president’s handling of both Covid-19 and the Black Lives Matter movement, anything can still happen and a second term for Donald Trump cannot be ruled out.
It’s time for investors to be prepared and consider the market impact of both outcomes.
Historically, Republican presidents have been expected to lead to a more market friendly outcome given their ideological preference for lower taxes and less market intervention.
At the start of this year, a second term for Donald Trump looked almost an inevitability – the S&P 500 had registered a 42 per cent increase from his inauguration to the very last day of 2019, unemployment was at a 50-year low¹ and Trump’s grassroots support showed little sign of waning.
The picture has begun to change and as the daily Covid-19 infection count continues to rise, so too does support for Biden in November’s election. In fact, a Democratic sweep of both Congress and the Senate looks possible if recent polls are reflected in the outcome in November.
Although nothing is inevitable, it is extremely hard for a President to build a case to remain in office in times of economic underperformance.
The only modern US presidents to have failed to win second term, Jimmy Carter and George HW Bush, did so during an economic downturn. So how should investors prepare?
It’s the economy, stupid
When it comes to the domestic economy, a potential Biden administration will likely implement two measures which will have ramifications for markets.
Firstly, Biden has expressed support for a national $15 minimum wage. This would hit labour-intensive sectors such as retailers the hardest, but could provide a tailwind for less labour-intensive high margin sectors as consumers have more money in their pockets to spend each month.
On the other hand, if Trump holds on for a second term, we could expect banks, industrials and infrastructure to mirror their performance in 2016.
Secondly, Biden seems to be ready to roll-back Trump’s cuts to corporate taxes, either partially or completely. This would simultaneously provide a signal to markets that the new president’s views are less market friendly, as well as negatively impacting net corporate earnings for US based companies.
This may well cause stock values for companies with exposure to the US to fall and may prompt businesses to reconsider where to base their operations.
It’s the environment, stupid
With every passing day, Environment, Social and Governance (ESG) considerations increasingly dominate the investment agenda, a trend which may well accelerate after Covid-19.
In this space, the two candidates are worlds apart.
Following the lead of many other developed nations, Biden has committed to implement a climate plan that will ensure the US reaches net-zero carbon emissions by 2050.
In contrast, Trump has steadily rolled-back environmental protections during his time in office, including withdrawing the US from the Paris Climate Agreement and ending the Clean Power Plan.
In the event of a Biden victory, it seems likely that those firms who operate in the green economy will perform well, and those that operate in traditional, carbon-intensive sectors could perform relatively poorly.
Easing of trade tensions?
Throughout his presidency, Trump has made trade with China a key issue in his quest to reshape international trading systems for the benefit of his ‘America-first’ mantra.
Having built barriers to trade, Trump signed a ‘phase one’ trade agreement, which while fairly limited in scope, could be the first of many such agreements with China to gradually liberalise trade, but in a way which is consistent with the US’s strategic priorities.
Biden’s election campaign statements suggest that he will continue to be strong with China so it is hard to see how the trade tensions will ease following a Biden victory. Some have suggested that China may take advantage of a change of regime to soften their stance without a loss of face and if this turns out to be the case, relations could improve and with them trade.
This is an area that investors would be well advised to watch carefully.
In the 2016 election campaign, Trump was the underdog, and the one who could make wild accusations with fairly limited scrutiny of his own record. Things are likely to be very different this time round putting the President on the defensive, forced to justify his actions in full view of metrics available to evaluate his success.
Anything can happen, and as a matter of prudent risk management, investors should be prepared.
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