Weekly Update - The First Countdown - US election primer

The election race
Joe Biden leads Donald Trump by a wide margin in opinion polls, betting odds and online prediction markets, wider than Hillary Clinton enjoyed at the same point in the 2016 campaign. However, a majority of votes nationwide does not necessarily translate into a majority in the electoral college – a swing towards Trump in a few large states could quickly change the dynamic of the race. We believe that Biden will end up in the White House but with a narrower majority than expected by markets and that the Senate might remain in Republican hands, acting as a counterweight to the Democrat’s
policy initiatives.

Background to the elections
The coronavirus pandemic has hit the US harder than almost any other developed economy in terms of confirmed cases and deaths. Moreover, despite exhortations from the President, restrictions on activity remain relatively high and mobility measures are well down on normal levels. The Federal Reserve acted promptly with rate cuts and asset purchases and is set to keep policy easy for years to come. After a dramatic Q2 slump, activity recovered quite rapidly initially but the pace
has slowed in recent weeks. With supplementary unemployment benefits set to disappear, more fiscal stimulus is needed but negotiations in Congress have failed to make progress. A deal looks unlikely before the election.

Policy positions
Donald Trump is campaigning on his track record of tax cuts, deregulation and a preference for bilateral engagement rather than via multilateral institutions. Joe Biden’s policy platform is much more detailed, as befits the challenger. He plans to reverse much of Trump’s tax cuts on corporations, enhance Obamacare, raise minimum wages, boost green investment spending, R&D in technology and federal procurement from American companies, a package which would deepen deficits but boost long-term growth prospects.

Impact on the markets
Neither candidate’s policy platform is likely to be positive for the US dollar, with Biden’s likely to exert more downward pressure than Trump’s. Biden’s policies are more business-unfriendly, especially his focus on higher taxes and tighter regulation. However, full implementation of his promises is unlikely unless the Democrats win both houses in Congress. Nevertheless, equity markets tend to rise in the aftermath of elections, with the exception of the two most recent bear markets.

Bottom line
Although economic growth looks sluggish, monetary policy remains very supportive and fiscal stimulus is likely after the election, with a Biden victory ensuring a larger package. All in all, US equities remain richly valued in our view – which limits the scope for continued outperformance – but this policy mix represents a rather supportive backdrop.

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