24 August 2020

    Trump versus Biden

    How will markets react to the US election?

    Chris Waters

    Senior Investment Analyst

    Email Chris
    Chris Waters

    Senior Investment Analyst

    Email Chris

    With less than 100 days until the US Presidential election, Democratic challenger and former Vice-President Joe Biden is leading nationwide polls. Three months is a long time in politics, and if we learnt one thing from 2016 it is to never rule Trump out, but for now Biden is favourite to win. A common perception is that Democrats are bad for business and the economy, however we do not necessarily think a Biden win would be negative for markets.

    Biden is in a strong position, but three months is a long time in politics

    Despite coming into the year as favourite to win, the challenges of covid-19 and a slowing economy has seen President Trump falling behind in the polls. Betting markets currently have Biden at a 60% chance of winning. Now these betting markets also had Hillary Clinton at an 83% chance of winning on the eve of the 2016 election and we all know how that ended. The real campaigning has only just begun, and the highly anticipated debates are not until October. But if Biden were to win, what could that mean for business and the markets?

    Proposed stimulus may offset tax and minimum wage headwinds

    The Democratic Party in the US has historically been viewed as “anti-business”. While this can be debated, Joe Biden himself said he wanted to end the “era of shareholder capitalism” – which while aimed more at shareholders than the businesses themselves, does not help dispel this view.

    Reading Biden’s proposed policies, there is no clear answer as to how businesses would fare under Biden. The proposed tax increases on corporations and higher minimum wages will hurt profit margins. However, the effects of such hikes would be offset somewhat by significant stimulus spending and investment in infrastructure, green energy and healthcare. Even the impact of a higher minimum wage is hard to assess, as tens of millions of consumers will have more money to spend on goods and services. Lastly, reduced trade uncertainty and lower tariffs are both positive for business.

    Turning policies into legislation is no easy task

    Regardless of policy, we cannot underestimate the difficulty in getting legislation passed in the US. It would take a separate article to explain the complexities of the US legislative system, but not only does Biden need to win, but the Democrats also need to win a majority in the Republican-held Senate. If Republicans retain control it will be almost impossible for Democrats to enact major legislative changes. Even then it is not all smooth sailing. Obama barely passed his signature healthcare plan even with the Senate under his control.

    The most likely outcome is that only some of Bidens key policies become law, and even then, they will probably be watered down.

    We cannot easily predict election outcomes, let alone market reactions to those elections

    Translating expected policy outcomes into future market returns is even harder. Despite this, pundits and investors are obsessed with how elections may impact equity markets, and most people think that a Biden win will be negative for markets.

    But what people expect and what actually happens is often not the same thing. This is true for both election outcomes (who really thought Trump would win) and market reactions. Many thought a Trump presidency would be bad for markets, but until COVID the S&P 500 had risen 61% under his tenure. We saw a similar dynamic with the Brexit vote, where financial markets quickly shrugged off pre-vote concerns.

    Trump’s stock market performance does not necessarily reflect a more pro-business stance either. Research by Vanguard showed that the average of yearly returns over the last 160 years are virtually the same under Democrat and Republican administrations.

    The reality is that while policy can have an impact on specific industries, it has a more limited effect on overall market returns. Factors such as valuations, corporate profits, business cycles and federal reserve policy have a much larger impact.

    Focus on investment fundamentals, not politics

    We do not think it is possible to predict how markets would react to a Biden presidency. Attempting to predict short-term market movements driven by politics is a sure way to hurt investment returns. Longer term, stock prices are driven by underlying company profits. We think that finding competitively advantaged businesses that can grow earnings over the long-term regardless of who is in the White House is the right way to achieve good investment outcomes.