An overview of the US election next week
A truly momentous year is about to see a similarly historic US presidential election campaign come to an end next week, with markets still expecting a 'Blue' Democrat victory of some sort. The curveball of an existing commander-in-chief contracting Covid-19 a few weeks ago has also now been put into context by the start of wave two (and three?), which has caused increased volatility in markets across the board.
Of the many fascinating facts and figures that we have read over the last several months about the US election, the one that resonates most is a simple one - history strongly favours the incumbent. Since 1932, nearly three-quarters of sitting presidents have been re-elected and the current White House tenant has never failed to win re-election unless a recession took place during their time in the Oval office. The last President who failed to win a second term was George H.W. Bush beaten by Democrat Bill Clinton in 1982, while only two other sitting presidents have endured a single term presidency since Herbert Hoover way back in the early 1930s after the stock market crash of 1929.
Current polls are showing further gains for the challenger Biden who appears to be picking up more of the vote in some swing states. That said, we know even from very recent history that a candidate favoured by pollsters does not always win once the votes are counted. It is of course elections, and not public opinion polls that decide the eventual winners.
Two key areas of consideration are firstly, that the new president's ability to pass his legislative agenda depends on the extent to which he controls Congress. Ultimately the best outcome for investors may be a unified government as the market can then price in higher deficit spending, economic growth and inflation more aggressively. Early 2021 fiscal stimulus is crucial, with all that entails for increased bond supply. Even then, the Fed seems to be set for interest rates to remain low for the foreseeable future as the bumpy road to recovery from the pandemic continues to hurt economies across the globe.
One other important area of uncertainty to consider is that more often than not, electoral campaign proposals are watered down once the candidate is in power; "build the wall" springs readily to mind. In which light, fiscal policy settings have actually been far looser under Republican Presidents than under the Democrats, which goes against their 'tax and spend' image. Will the fiscally hawkish Republicans, the same ones that were unwilling to sign off on a new stimulus bill before the election, lose sight of their principles once in power, like many politicians before them?
In the long run, market cycles matter more than policy shifts tied to election outcomes. But volatility should probably be expected. Large market moves are neither irrational nor unexpected in the context of this year.
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This article was submitted by Lukman Otunuga, Senior Research Analyst at FXTM.
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