What is being contested?
On 3 November, there will be a presidential vote, taking place via the Electoral College (EC) system, between Republican President Donald Trump and the Democratic nominee Joe Biden. Mr Trump’s vice presidential candidate will again be Mike Pence, while Joe Biden’s running mate is Kamala Harris, junior US Senator for California. Elections will also take place for all 435 of the seats in the House of Representatives, 35 of the 100 Senate seats, 13 state and territorial governorships, as well as numerous other state and local elections.
What is the Electoral College?
The US presidency is not decided directly by who wins a majority of popular votes. Instead, Americans in each of the 50 states and the District of Columbia vote for a group of officials known as the Electoral College (EC). It is these 538 electors who cast votes to choose the president.
The number of electors that each state has varies according to the size of their population. The largest states are California (55 delegates), Texas (38), New York (29) and Florida (29). All states except Maine and Nebraska are "winner takes all", meaning that all of the delegates must go to whichever candidate gets the most votes in their state. The president needs 270 EC votes to win (half of 538 plus one).
Which states really matter for the presidential race this time?
The RealClearPolitics Electoral College model sees Mr Biden securing at least 222 EC votes. Mr Trump’s tally is 125. That leaves 191 EC votes currently undecided. Of those, 145 across nine states look to be particularly crucial battlegrounds this time. These are Arizona, Florida, Georgia, Michigan, Minnesota, North Carolina, Pennsylvania, Ohio and Wisconsin. Current state-level polling, as summarised in the table below, shows Mr Biden picking up almost all of these EC votes and thereby most likely taking the presidency.
| State | EC Votes | Current polling - RealClearPolitics | 2016 result |
| Arizona | 11 | 4ppt lead to the Democrats | Trump carried the state by 4ppts |
| Florida | 29 | 2ppt lead to the Democrats | Trump carried the state by 1ppt |
| Georgia | 16 | Tied | Trump carried the state by 5ppts |
| Michigan | 16 | 7ppt lead to the Democrats | Trump won by 0.2% |
| Minnesota | 10 | 8ppt lead to the Democrats | Clinton carried the state by 2ppts |
| North Carolina | 15 | 1ppt lead to the Democrats | Trump carried the state by 2ppts |
| Pennysylvania | 20 | 5ppt lead to the Democrats | Trump carried the state by 1ppt |
| Ohio | 18 | 3ppt lead to the Democrats | Trump carried the state by 8ppts |
| Wisconsin | 10 | 7ppt lead to the Democrats | Trump carried the state by 1ppt |
Polling from RealClearPolitics – extracted 28/9/2020 Ppt - percentage point
Can we trust the polls anymore?
It is sometimes said that the pollsters got the 2016 election completely wrong. However, polling experts protest and it appears with some justification. On average since 1972, polls in the final 21 days of presidential elections have missed the actual margins of the shares of the popular vote in those races by 4.6ppts. The error in 2016 (across state and national polls) was 4.8ppts. As such, it did not require an unprecedented polling error for Trump to win in 2016, which is what happened.
Perhaps more interestingly it was the state-level polls where the error was larger – in 2016 they missed by an average of 5.2ppts (compared to just 3.1ppts in national polls), albeit still with the state-level miss within normal ranges. One serious worry would be if polls were statistically biased in one direction or another. In the 2016 general election, polls had a pro-Democratic bias of about 3ppts.
That was reasonably consistent across presidential, gubernatorial and congressional races. But the bias tends to shift unpredictably from election to election. Polls had a pro-Republican bias in 2012, for example. So we cannot say with any confidence that polling bias would stay in the Democrats’ favour this time around. In the context of typical polling errors, Mr Biden still appears on a good footing to win the presidency. However, there is still plenty of time for polls to shift between now and 3 November.
It is not just the presidential race that matters, is it?
No, but particularly so at this moment in time. Currently, the Republican president and Republican-controlled Senate face an opposing House of Representatives, controlled by the Democrats. One of the implications of this is that Capitol Hill has not been able to agree on a new fiscal package, urgently needed to support US households and businesses amid the coronavirus pandemic.
In the absence of a clear sweep by one party across all these levels, Congress is likely to remain divided and therefore limited in responding to the pandemic and rebuilding momentum in its aftermath. Further ahead, divisions would also weigh on the ability of the new president to enact his policy choices.
Aside from the presidential race, both the House and the Senate races remain in play. Most models and predictions for the House lean toward the likelihood that the Democrats will retain control. The Senate race, however, looks extremely tight, with eight of the 35 seats up for election looking like they could go either way.
These include Arizona, Georgia (Senior Senator), Iowa, Maine, Michigan, Montana, South Carolina and North Carolina. Bearing in mind that the current split is 53 Republicans against 47 Democrats, there is all to play for here.
What are the main policy promises from both sides?
There are two main areas of focus for financial markets when it comes to comparing President Trump and Mr Biden’s fiscal stances. The first is on trade and America’s role in the world. President Trump’s position here is widely known and he appears set to press ahead with this in pursuit of his goal of boosting domestic manufacturing.
This likely means he will pick-up his talks with China, which have been mainly paused for this year, while pursuing trade disputes with other regions, not least the European Union. Mr Biden has his own made-in-America manufacturing plan. But he has not indicated an appetite to pursue this overwhelmingly through tariff action and he may well opt for a more collaborative global stance. He has also pledged to spend $700 billion on American-made products.
Tax policy is one of the other key differences of the policy platforms of the two candidates. President Trump has attacked Mr Biden’s talk of tax increases, where he has indicated plans to reverse some of Trump’s 2017 tax cuts.
The key tax pledges are below. Of course, whether these are enacted will depend on the Senate and House of Representatives results.
Key tax pledges
Corporate Taxes
President Trump reduced the corporate tax rate to 21% from 35% and made it easier for companies to deduct capital investment costs and bring back foreign profits.
Mr Biden says he would reverse this and raise the corporate tax rate to 28%. He says he would also impose a new minimum tax on US companies and raise taxes on the foreign income of many US-based multinationals.
Personal Taxes
Most of the personal tax breaks enacted in 2017 end after 2025 but President Trump wants to extend them. Near term, he also wants to forgive any payroll taxes that are deferred this year. Mr Biden intends to keep the 2017 tax cuts for households making less than $400,000. For higher-income households, he has proposed a range of tax increases. They include a top individual tax rate of 39.6%, up from 37%. He also plans to expand the 12.4% Social Security payroll tax. He would also repeal a 20% deduction for income from pass-through businesses as it applies to high-income households and impose new limits on itemized deductions.
Housing relevant tax changes
Mr Biden plans to repeal the $10k cap on the state and local tax deduction, a change from 2017 that raised taxes on high-income households, notably impacting New York, New Jersey and California. He plans to offer targeted tax credits for middle-income households, including proposals aimed at boosting retirement savings, child care and first-time home purchases.
Capital gains
Mr Trump did not change those rules in the 2017 tax law. Now he proposes to cut capital gains taxes, taking the top rate down to 15% or 8.8%, from 23.8%. Mr Biden intends to move the other way. He intends that the top capital gains rate would increase to 39.6%, for households with income exceeding $1m. He would also make changes to the way capital gains are taxed at death.
On wider policies, the candidates’ plans span well beyond those on tax and trade. A summary of some of the other key issues is included below.
What are financial markets focusing on?
The US dollar has been struggling for momentum over recent months amid political paralysis on Capitol Hill. Recently, the implications of the election on the dollar have come into even sharper relief with dollar-implied volatility spiking around election day. Here are some of the key considerations.
Firstly, continued divisions in Washington would likely continue to weigh on the greenback, whether it be under President Trump or Mr Biden. As such, it is not only the presidential result but perhaps even more so the control of the related legislatures, which matter for US economic prospects and the dollar in the months that follow. A victory for Mr Biden and the Democrats across Congress would arguably have the most significant implications for the dollar, presenting the biggest shift from the status quo. This outcome would pave the way for a more decisive, supportive, fiscal response to the pandemic in the near term. It would also likely trigger a somewhat less aggressive China stance.
However, after the challenges of the pandemic have passed, dollar investors would have to face up to likelihood of Mr Biden setting out his less market-friendly and more growth restrictive tax regime, which would no doubt be met with a wave of nervousness in risk asset markets.
Equity markets also have the complexity of the above issues to grapple with. As such we also suspect it is not as simply repeating the familiar statement that equity markets are often judged to favour the installation of a Republican president.
In the near term, equity markets would also likely be grateful for a policy outcome which paved the way for much greater pandemic fiscal support. They may also gain reassurance from Mr Biden. Although he intends to push “Made in America”, he is less consumed by the US trade deficit and therefore tariff wars.
However, further ahead, Mr Biden intends to introduce key tax changes and, if Congress allows, these look set to include a sharp step-up in corporate tax rates and an increase in capital gains tax, which will not be judged favourably by equity markets.
Finally, for both dollar and equity market investors, the prospect that the election result might be contested altogether adds a further complexity amid the possibility of even greater paralysis following on Capitol Hill.
Is there a risk of the election result being contested or delayed?
Amid the pandemic, the absentee voting system has changed in many states. There will undoubtedly be greater use of postal ballots, which have had issues in the past and come with risks. According to the US Election Assistance Commission, in the last four federal elections, 2.7 million mail-in ballots were misdelivered and election officials rejected 1.3 million. And while most likely on a small scale, there is also the potential for fraud. Issues such as these could lead to the result being delayed or contested.
A total of 31 states are currently allowing any registered voter in the state to request a mail-in ballot as a result of the coronavirus pandemic, provided that they are registered before a specified date. Only a third of these require accompanying documents or for voters to at least register in person to validate their identification. In a further nine states, all registered voters before a specified date are automatically sent a mail-in ballot, not requiring a reason for absentee voting.
Ten states have slightly stricter rules, requiring registered voters to have a valid reason which prevents them from voting in person, such as illness or being over the age of 65. However, three of these include being concerned about the virus as a sufficient reason for the use of a mail-in ballot.
Among the nine key undecided states mentioned earlier, all allow any registered voter to apply for an absentee mail-in ballot, with only Pennsylvania, North Carolina, Ohio and Wisconsin requiring additional identification information to accompany the ballot (unless exempt for various reasons).
President Trump has repeatedly refused to commit to accepting the election outcome, mentioning the scope for fraud and delays in the postal system which mean the results might not be known “for months, or for years”. If the result is disputed or delayed, the Supreme Court and Congress are likely to be involved in determining the next president. Many will remember the 2000 election when George W Bush and Al Gore were involved in a dispute over vote counts in Florida, which escalated to the Supreme Court. However, legal scholars argue that the Supreme Court is unlikely to intervene to decide the outcome and that Congress may well be called to take a more significant role this time.
Under the US Constitution, it is Congress that has responsibility for counting EC votes. That could be a slow process though, with states having until 8 December to resolve any disputes and state electors casting their votes to the EC on 14 December. The newly-elected Congress would then be expected to tally the votes on 6 January.
What happens if a dispute is still rumbling on in January?
Legal scholars have drawn parallels with the disputed 1876 election when several states sent competing EC votes to Congress. It took until two days before inauguration for the situation to be settled. After this, the 1887 Electoral Count Act was passed to try and stop a future repeat of this, but there is said to be scope for interpretation. If no president is chosen by inauguration day on 20 January, an acting president will serve as a caretaker.
According to succession laws, this would be the Speaker of the House of Representatives, who is Nancy Pelosi, a Democrat, assuming she maintains this position in the new Congress. Perhaps this would spur President Trump into a resolution. Ultimately at this stage, it may come down to public pressure to force the two sides into settling any ongoing dispute.
