Potential market reactions to the upcoming US Presidential election

Shannon Rivkin shares his thoughts on the upcoming US presidential election and its potential impact on the markets.

At the beginning of September, I wrote an article discussing the potential concerns I had about the short-term direction of the market in the event of a contested US presidential election. At the time, Democrat Joe Biden had a solid lead but a margin close enough that I felt the election could end up in court over the late counting of mail ballots which Donald Trump has consistently said are prone to fraud. With polling showing a far higher number of Democrats planning on voting by mail than Republicans, any fight over mail ballots would undoubtedly favour Republicans and would likely lead to significant social unrest. And that scenario has only become more concerning with the death of Ruth Bader Ginsburg and the 6-3 conservative/liberal tilt of the Supreme Court after nominee Amy Coney Barrett is likely confirmed in the next couple of weeks.

Since then, markets have actually begun to rally significantly as polling for Joe Biden has improved. This has come as a result of a worsening pandemic – symbolised by Donald Trump’s infection – and a missed opportunity in the first debate. I have made it known that in my view a clear winner – either Republican or Democrat – is the best possible result for equities, but with the election less than two weeks away I thought it worthwhile providing a list of possible outcomes and their potential impacts on the market. I have done this list ranked by the highest probability outcomes.

1. The current polling holds up and we see a clear win for Joe Biden, with the Democrats holding onto the House and winning the three seats required to take the Senate. Polling has had its fair share of criticism after recent fails in picking Brexit, the 2016 Trump win and ScoMo’s surprise win, but for the most part it remains the best tool to predict the outcome and is typically more accurate than not. The short-term implications would be that we see a big pandemic relief stimulus bill (exceeding $US2trn) and an infrastructure bill early next year, both of which could contribute to a relief rally. Long-term we expect increased corporate taxes but an improved economy which should flow through to the consumer, meaning any impact on corporate profits from higher taxes may be offset by a better underlying environment. Big agenda items which would come would be big spending on transitioning to clean energy (likely good for the economy with new jobs and better economics of renewables), and potentially a tougher antitrust environment for big tech. While this may primarily impact the giants of the space, this could lead to weakness across the sector in sympathy.
2. Current polling only has the Democrats with a slight chance of re-taking the Senate, so in my view the next most likely outcome is a Biden presidency but with a Republican Senate. This would be very problematic as it’s likely the Republicans in the Senate would revert to their old ‘limited spending’ ways and would be eager to prevent any big wins for the new president. In this event, I think some short-term weakness would be likely but the long-term concerns for higher corporate taxes and increased regulation for big tech would be reduced. This is probably the ‘worse for the economy, better for Wall Street’ result.
3. A close, contested election. We’ve seen this in 2000 when markets fell over 8.5% before Al Gore’s concession, but this would likely be far uglier and last longer with the country divided more than ever. In this event, it’s hard to see Democrats ever seeing a loss as legitimate given the likely impact the Supreme Court could have on the outcome and the potential voter suppression tactics used to slow down mail etc. Likewise, a loss for Republicans would likely come with unrest from Donald Trump’s base amid claims of ‘voter fraud’. And with the potential legal battles across multiple states (as opposed to just Florida in 2000), this would drag out for a while longer. The only positive in this environment is that, once a winner does eventually emerge, the continued supportive environment (expansive monetary and fiscal policy) would probably lead to a strong eventual recovery so any sell-off could be a solid buying opportunity.
4. A win for Donald Trump but a loss for the Republicans in the Senate, thus likely hamstringing any legislative agenda items throughout the next four years as both parties continue to fight more than ever. Considering the Democrats control the House currently, this would potentially be more of the status quo which has ultimately been supportive of equity markets. Additionally, I think the new Senate would support stimulus so this would be enough for a relief rally.
5. A win for Donald Trump and the Republicans hold the Senate. The Republicans have basically no chance of regaining control of the House, so this would be a continuation of the status quo but probably even better for equities in the short-term as a big-spending relief stimulus bill would no longer be seen as the political problem for Republicans in the Senate. The Democrats in the House are already committing to a big-spending bill, so this would likely come quickly, and we would probably see a relief rally.