With just under 100 days until the US presidential election on 3 November and Donald Trump trailing in the polls, Trustnet looks at past campaigns to find out what the next 100 days will look like for markets.
Going back to 2016, events appear to be repeating themselves, to a degree.
Again, Trump finds himself behind in the polls, this time trailing Democrat nominee Joe Biden, previously Barak Obama’s vice president.
During the previous presidential campaign, the election outcome was thought to be a forgone conclusion, with data compiled by The New York Times suggesting that Hilary Clinton had an 85 per cent chance of winning as late as one day before the election. However, Trump overturned those odds and secured the presidency.
While, historically, presidential elections strongly favour the incumbent, that advantage has been eroded by the recessionary impact of the Covid-19 pandemic. And it is very rare that a serving US president has been re-elected in a recession.
No president since Calvin Coolidge in 1924 has been re-elected when there was a recession within 24 months of voting day. Indeed, only five incumbent presidents have ever lost an election and three of those were during a recession.
The current economic downturn is obviously very different, however, having been triggered by a global health crisis rather than poor government or banking policy.
The emergence of the pandemic caused the fastest bear market in history, with US stocks dropping by 20 per cent in just 16 days. But asset prices have rebounded sharply since March due to central banks and policymakers pumping trillions of dollars’ worth of stimulus into the economy.
Year-to-date, the MSCI North America index is outperforming the MSCI World, making 3.41 per cent versus 0.81 per cent.
Performance of indices YTD
Source: FE Analytics
So, although the market is enjoying a bullish recovery – Trump’s political signature – the economy is floundering.
US unemployment is currently 11.1 per cent, according to the US Bureau of Labor Statistics, as businesses have remained closed amid lockdown conditions and job losses have mounted.
And Trump’s reaction to Covid-19 has been widely criticised over his politicisation of the pandemic and refusal to take more drastic steps to curb its spread.
Currently the US rate of infection continues to increase, with more than 4.3 million confirmed cases and 149,767 deaths. One of the highest mortality rates in the world, according to data collected by Johns Hopkins University.
Yet in a recent interview Trump claimed that the US has the lowest mortality rate in the world.
So, with eyes fixed on the presidential elections on 3 November, Trustnet asked market experts what investors should expect.
One thing they all agreed on was an increase in market volatility. Markets characteristically like consistency and certainty, and the US presidential election is a major source of potential upset for markets and the geopolitical equilibrium.
“In terms of stock markets, it is hard to say anything concrete about the likely impact of the election, said Maria Paola Toschi, executive director and global market strategist for JP Morgan said earlier this year.
From the start of 2016 to election night the CBOE SPX Volatility index – Wall Street’s so-called ‘fear’ gauge and a measure of the 30-day forward-looking volatility of the S&P 500 – was up by 63.79 per cent.
Year-to-date in 2020 the same index is up by 182.86 per cent, having been driven up substantially by the coronavirus.
Discussing what investors might expect from a Biden-Democrat win, Vincent Ropers, co-manager of the TB Wise Multi-Asset Growth fund, said there would be three major impacts.
First, “a rollback of most of Trump’s signature corporate tax cuts, which Biden has pledged,” he said, which was estimated at around $2trn and would hit the mega-cap tech companies hardest.
The Democrat said he would raise corporate tax from 21 per cent to 28 per cent, which Trump had previously slashed from 35 per cent in 2017 – a move widely credited with driving the US market’s growth in recent years.
Secondly, Ropers said, if the Democrats also regain control of the Senate there may be “a sudden pivot from polices that have supported stock prices in recent years, such as deregulation”.
Democrats may also be more likely to pursue antitrust cases against market titans, such as Amazon, the manager said.
“On the other hand, Biden’s plan for a $2trn Green New Deal would have significant implications for the economy and the country’s infrastructure,” Ropers added.
The third factor, the manager said, is investors realising what reassurance a clear, open political agenda can bring, regardless of how displeasing they are for markets.
“After all, uncertainty is one of the market’s worst enemies and it has struggled at times with Trump’s impulsive governing-by-tweet style,” he explained. “Investors need to weigh up the short-term and long-term impact of a Biden candidacy.
“Ensuring a portfolio has the right amount of diversification and protection measures can mitigate any short-term volatility if the markets do not react well to a changing of the guard.”
On a Trump victory Andrew Lake, head of fixed income at Mirabaud Asset Management, said that he doesn’t see any real change in markets – with the favourable tax benefits staying in place – or policy agendas.
“If Trump succeeds, he will not have any real need to inhibit his actions, as he will be looking to lay down his legacy rather than having another election to win,” he said.
One thing that experts believe will remain the same, regardless of the winner, is the state of US-China relations. US relations with China have weakened under Trump’s administration – following Obama’s pivot to Asia – during the ‘tariff-war’ and may well remain fraught if Biden wins.
A candidate who is well-versed in political relations having served as chairman of the Senate Foreign Relations Committee for years prior to becoming vice president, Biden “will adapt to the dramatic shift in US public opinion on China and the tariff issue over the past few years,” Thomas Costerg, senior US economist at Pictet Wealth Managment, aid.
“The 2020 coronavirus crisis is turning out to be a game-changer for the US November elections,” Costerg said and it will “go down in history”, as the impact which heavily affected Trump’s chances for re-election.