Potential Market Impacts of the US Election

As of the time of writing, the US election remains up in the air with key battleground states still hanging in the balance because of the way the electoral college system is structured, resulting in the race that is closer than the polls had previously suggested. It could be several days before postal votes have been counted, with 270 votes required to win the election. Trump is unlikely to go out without a fight with a number of legal challenges having been filed in court which could result in ongoing market volatility until a clear winner emerges, and potentially until the President comes to office.

Over the longer term, both Biden and Trump will encourage fiscal spending which should be positive for markets and the economy.

We briefly look at some of the potential market implications:

Trump win (looking less likely at this stage) – May result in more of the same:

Positives: Fewer disruptions with tax cuts and deregulation likely which are ultimately positive for markets over the longer term. The stimulus from a Trump government would likely be more measured than a Biden sweep which could see some market concern in the short term. Technology stocks would likely benefit more under a Trump government with the potential for less disruptive oversight than under a Biden government sweep.

Negatives: More geopolitical risks including continuation of the trade wars with Trump’s erratic approach to trade policy with the current use of tariffs as a bargaining tool. There would be an increased risk of a Phase 1 trade deal with China collapsing with concerns over technology and security likely to escalate. This could weigh on global growth and markets if the tensions increased.

Biden win (appears likely to be a split government rather than outright win at this stage):

Positives: Likely to see a greater amount of fiscal spend than had been planned by the Trump administration and could see an increase in the minimum wage and a higher level of infrastructure spending. Small cap stocks could be beneficiaries under Biden’s potentially larger fiscal stimulus package as they’re more sensitive to the economy vs large caps.

Tensions between US-China will be less fractious which could result in some alliances being restored with US allies. An improvement in international relations would likely be positive for global trade and emerging markets in the short term. However, in a survey conducted by Pew Research Center, the % of Americans having an unfavourable opinion of China has increased over the past 2 years from below 50% to as high as 73% and was seen to be across both party affiliations which could mean that geopolitical tensions could persist for some time to come.

Negatives: Under a Biden sweep, tax increases would be negative for company earnings and the market in the short term, however it currently appears as though there will be a split government which would make it harder to push through major changes with the Republicans likely to create a gridlock. Under a sweep, big US tech stocks could come under stricter regulatory scrutiny in an attempt to limit their market dominance under a Democratic government which could result in some profit taking on sector rotation out of growth stocks and into more value orientated cyclical stocks (seen as beneficiaries to a stronger economy). The tech sector now makes up +25% of the S&P 500 index. However, under a split government it’s likely they will come under less scrutiny, which could be a positive in the short term.

Source: PIMCO

According to research conducted by PIMCO, historically markets tend to do best under a split government:

Source: PIMCO

Markets generally perform well post elections

Source: PIMCO

In recent history, according to PIMCO research markets tend to perform well following elections regardless of who wins. However, the picture is clouded with the US heading into winter with COVID-19 cases increasing which creates economic uncertainty with the increased risk of lockdowns. There is also the Trump factor. He’s unlikely to go out without a fight which could increase market uncertainty.

Timeline of the election process – from election day to finalising a President

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