While many investors are focusing on the binary outcome of a Trump or Biden victory in November, there are a number of more nuanced issues that have the potential to rattle markets after this year’s US presidential election. 
The US will take to the ballot box on 3 November, in what is seen as one of the most divisive US elections in recent history.
Incumbent Donald Trump, the Republican nominee, is continuing with his ‘America First’ messaging, with the recent addition of campaigning as the ‘law & order’ candidate. However, he has been criticised for his management of the coronavirus pandemic, as well as his handling of the Black Lives Matter protests.
Candidates’ performance in national polls
Source: Financial Times
Democrat candidate Joe Biden is leading in the polls, although it’s worth remembering that these surveys also had Trump down to lose the 2016 election. Biden has a more progressive agenda, seeking to raise the minimum wage, invest in green energy, expand Obamacare and undo Trump’s immigration policies.
Although the election itself will give markets plenty to deal with, investors cannot take their eye off the US political scene after the result is decided. Below, strategists highlight three more specific issues that could follow in the wake of the election.
A disputed election on ‘rigging’ claims
Some 72 per cent of investors believe a contested US presidential election was the biggest investment worry for the rest of 2020, according to a recent poll of more than 700 clients by independent financial advisory organisation deVere Group.
This compares with just 18 per cent who cited a second wave of coronavirus and 5 per cent who said they were worried by the US-China trade war. The remaining 5 per cent are worried by other geopolitical issues, including Brexit.
The below chart suggests that futures markets are also concerned about a contested election result, with investors preparing for higher volatility after the vote.
Vix futures
Source: Barings, Bloomberg. As of 24 Sep 2020
Nigel Green, founder and chief executive of deVere Group, said: “Investors around the world are beginning to freak about the US presidential election. But not about whether Trump or Biden wins, rather over the looming possibility of a disputed outcome.”
Trump has already started to question the legitimacy of this year’s election, such as by claiming that postal votes will be fraudulently used against him, and in recent weeks has suggested that any verdict in which he does not win the election is a rigged outcome.
“It’s getting ugly and investors are, rightly, concerned that this will generate massive waves of volatility in the markets, not only in the US, but around the world,” Green added.
“A contested outcome of the US presidential election will almost inevitably send the stock markets into a temporary tailspin – and this is weighing on investors’ minds. It is likely that any election-triggered volatility will be highly impactful for maybe only two or three weeks. As always, investors should remain in the market during this time.”
Coronavirus stimulus put at risk
While many investors are focused on the immediate aftermath of the election, Barings chief global strategist Christopher Smart thinks they should focus more of their attention on the US’ future fiscal policy and how it might evolve against the twin backdrop of the coronavirus pandemic and “partisan tensions” within the US’ House of Congress.
There was a massive policy response to the pandemic lockdown. Central banks – led by the US Federal Reserve – pumped trillions of dollars into the financial system while governments upped their spending to shore up the economy while easing unemployment.
However, the economic impact of coronavirus is far from over. The Organization of Economic Cooperation and Development predicts the global economy will decline by 4.5 per cent in 2020, with a rebound of 5 per cent next year. Most countries will not recover to their 2019 output levels over this time– and even this gloomy outlook depends on governments avoiding “premature budgetary tightening at a time when economies are still fragile”.
Smart said the picture looks encouraging in many parts of the globe. Major economies such as China, Japan, Germany and France have committed to keep spending relatively high to tackle the downturn, but there are questions over whether the US will do the same.
“House Democrats passed a $3trn plan in May, while Senate Republicans fell short of backing a much smaller package this month. A bipartisan group of self-declared ‘Problem Solvers’ in the House have coalesced around a package of $2trn, but the chances of any significant new support are dwindling as political acrimony rises around the confirmation of a new Supreme Court justice,” the Barings strategist said.
“These delays are not just about the pain to those facing evictions or bankruptcies. They are about permanent damage to America’s growth prospects — and the world recovery could suffer too. While economic downturns have generally been viewed as inevitable and fleeting, studies increasingly suggest that recessions leave permanent scars and undermine future growth potential. Thus, the effort to close deficits before the recovery is fully entrenched carries long-term consequences.”
While policymakers in Washington continue to talk about stimulus and the market expects to the US to do more even if this comes after the election, Smart argued that there are several reasons why the US could tighten fiscal stimulus too quickly.
“Improving economic data will make it more difficult to argue that generous spending remains crucial. Moreover, if Republicans are looking for a new leader after the election, many of them will be polishing their credentials as fiscal hawks, which could slow or shrink whatever is eventually approved,” he said.
“The danger is rising that whatever arrives will come too little and too late.”
Trump and Biden backing a trade war
Smart also warned that the US-China trade war – which was the main cloud over market sentiment until the coronavirus pandemic broke out – will continue to be a headwind no matter who wins the race to the White House.
Both Trump and Biden have struck a confrontational tone with China: Trump has repeatedly called coronavirus the ‘China virus’ while Biden has labelled Chinese president Xi Jinping a ‘thug’.
Almost three-quarters of Americans hold an ‘unfavourable view’ of China, an increase from about a third in 2005, and both candidates have called for tougher measures on the country.
Exports between the US and China
Source: Barings, Census Bureau. As of 31 Dec 2019
Immediately after the presidential election, there is a strong likelihood that relations between the US and China will improve regardless of who wins.
Trump will want to prove his deal-making credentials by progressing phase one of his agreement with China towards phase two, while Biden would want to show that a more methodical strategy can yield better results than Trump’s confrontational approach. But relations are likely to sour after this initial improvement.
“With the global economy still on the ropes, Trump, Biden and Xi all have an incentive to ratchet down uncertainty around trade, creating a brief opening for a new deal that curtails Chinese domestic subsidies in return for tariff relief,” Barings’ Smart explained.
“But the overall trajectory of the relationship is still headed for tougher times as the consensus in both countries rallies around a view that the other is irreconcilably hostile.”