The implications for financial markets
John Wyn-Evans, Head of Investment Strategy, Investec
Before we can even discuss the result of the election and its implications for financial assets, there is plenty of potential for surprises in the coming weeks. We already had the extraordinary development of Trump’s coronavirus infection. And remember that the late revelation of an FBI investigation into Hillary Clinton’s private email servers might well have swung the balance against her in 2016. What might the dirty-tricksters pull out of the hat this time, in what is already shaping up to be a polarising contest?
The election of a new member of the Supreme Court is also fraught with tension, especially as it might have a bearing on the final outcome of the presidential election. Then we also have the almost daily shifts in expectations for further pandemic-related stimulus packages. It seems almost assured that markets will be more volatile in the run up to 3 November, an expectation visible in the forward curve of volatility index futures. But in the long term, investors should hold their nerve and look to take advantage of potential mispricings that might arise.
Then we have the possibility of a contested result, notably in the handful of swing states that will determine the outcome. The historical example of 2000, with multiple recounts in Florida, is not encouraging for share indices, as the S&P 500 retreated more than 10% during the period of uncertainty. However, one must take into account the context of the retreat from the highs of the technology boom at the time, as well as tightening monetary policy. This time the Federal Reserve’s monetary taps are fully open and will remain so.
About the only thing that is certain is that the US Constitution demands that a president will be sworn in on 20 January. One might be surprised to learn that, in some headline areas of policy, the differences between the two candidates are not as great as one might be led to believe. However, it is the execution of the details that will be very different. Both are going to use fiscal policy to continue to reflate the economy because austerity no longer wins votes. Both will continue to be “tough on China” because a majority of the American population has a negative opinion on the country.
"All of this spells a period of weakness for the dollar that, when combined with growth-boosting policies that are being echoed globally, will be positive for non-US economies and markets."
However, Biden’s spending policies focus on greener, more sustainable initiatives. The Democrats’ “Green New Deal” is a marquee policy, unashamedly playing to the fears of climate change, but at the same time promising US leadership in the related technologies. $2 trillion or more of expenditure is promised. This is a boon for the green energy sector, and relatively negative for the fossil fuel industry.
Biden will also push forward with extending the Affordable Care Act (Obamacare), potentially to the detriment of the healthcare sector owing to price caps and cuts. He promises to be less confrontational on trade, although China will not be let off the hook. We will potentially see the US show a more united front against China with traditional allies in Europe and Japan, for example.
Of course, this largesse will have to be funded somehow, and it is probable that taxes will rise, with the focus on reversing at least a portion of Trump’s 2017 corporate tax cuts, as well higher capital gains taxes. Although neither is essentially a positive for riskier financial assets, investors remain relatively relaxed owing to the more predictable nature of future policy. Bond yields could rise in the face of greater issuance of government bonds, but there is a limit to how far the central bank will allow this to go.
All of this spells a period of weakness for the dollar that, when combined with growth-boosting policies that are being echoed globally, will be positive for non-US economies and markets, which tend to benefit from a weaker dollar during reflationary periods. The fact that the mega-capitalisation technology companies are also potentially in the line of fire for tighter regulation further suggests that non-US markets could outperform.
Trump also wants more stimulus, but in a form that will be less planet-friendly – more oil and more defence spending, for example. It is not entirely clear what his second term trade stance with China would be. Double down the aggression, or seek to endorse his deal-making credentials? Such uncertainty will not be helpful. But he will continue to lean on the central bank to provide liquidity, and therefore it is difficult to see a sharp sell-off developing.