Bid for the White House: Equity market prepares for U.S. election

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21/08/2020
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As U.S. presidential elections go, this one is feeling almost British with limited build-up, muted excitement and no rah-rah rallying conferences. The first presidential debate is due to occur on 29 September – it is likely to be widely watched as it presents the first opportunity for many voters to observe each of the candidates facing off to one another and what they are likely to offer.

President Trump’s approach is broadcast globally on a weekly basis such is his profile and willingness to pass opinion, no matter how divisive and controversial this may be. As for Joe Biden, much less is known although the appointment of his vice-president, Senator Kamala Harris, could be seen as a master stroke being of ethnic heritage and also female, both sectors of U.S. society that have come into significant conflict with President Trump’s politics. Boosted by Harris’ recent poll rankings as ‘one of the most popular active politicians in the country’, indications are that the Democrats have a commanding lead, but this cannot be relied upon with over two months to go. However, President Trump has defied the odds before, and no-one should underestimate his political skillset. A Democrat in the White House will likely incur higher taxes and likely reduce corporate profitability, which may impact stock markets and reduce the all-important 401k pensions of the populace. Then again, do the majority really want another four years of the most divisive President of the U.S. we have seen for decades?

Some argue that the only reason President Trump was elected was because voters hated Hilary Clinton more. The bar was set very low. How bad could President Trump really be on a relative basis? Those same commentators may now argue that maybe they should have gone with what they knew rather than the unknown as the experience has been excruciatingly underwhelming, dragging U.S. politics into a world of misinformation and deceit. But then again, isn’t that largely what politics is all about? As Abraham Lincoln said, ‘You can fool some of the people all of the time, and all of the people some of the time, but you cannot fool all of the people all of the time’. Voters know exactly what they are getting with Donald Trump and, before the pandemic arrived, he was widely expected to win a second term. The economy was strong, equity markets were hitting new highs and he was delivering on his anti-China, America first pledges. That has now somewhat fallen apart and it will be difficult for Donald Trump to crow about his more recent Presidential successes. He will probably find some way of boasting about what he has achieved in his inimitable way but the ammunition choices for Biden are extensive.

Historically, the U.S. equity market has preferred the election of the incumbent on second term elections. This is most likely due to the ongoing certainty and familiarity this provides. A new government and from the opposite end of the spectrum delivers significant uncertainty as to what lies ahead. We recall when President Trump was elected, initially the markets took fright but then, as confidence built, it was realised that what Trump said on the campaign trail, he was going to deliver – no rhetoric or false promises. This was a corporate leader who was expecting to drive through his pledges for his shareholders, as promised. This was revealed time and time again, most notably when he began the introduction of trade tariffs, despite all the economic commentary as to how damaging this would be and how little benefit would be achieved for U.S. industry. Nevertheless, he has ploughed on such that there is now a broad bi-partisan anti-China approach from Congress and this is unlikely to change whoever occupies the White House.

There is a general view amongst investors that left-wing socialist policies are bad for economic growth as they result in higher taxes and a redistribution of wealth from the rich to the poor. Conversely, the view on right wing monetarist policies is that these are good for economic growth and result in lower taxes and whilst the rich get richer, this cascades down for all and into stronger corporate profits and better returns for investors. There are many counter arguments to these philosophical views and considerable contradictory evidence that equity markets and the political ideology of the White House occupant are correlated. As with so many investment assumptions, they have to be put in context and it all depends on the environment at the time and the ‘mood’ and expectations of the market.

On balance, we are still attracted to the U.S. equity market relative to others partly due to the dominance of technology, albeit looking somewhat fully priced at these levels. As the election period gears up and the political rhetoric and fighting increases, this will introduce a significant uncertainty blanket over the market. This will probably deliver a range-bound environment of non-commitment whilst investors await the result before being willing to take any strong positions on conviction. Buckle up, hold your breath and try to enjoy the ride if you can.

 

 

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