US Election Outlook and Expectation for Investors
- 22 October 2020
- 10 mins reading time
On 13 October we hosted a webinar in which the outlook for the US election was discussed. The main guest speaker was Lew Lukens, Senior Partner at Signum Global Advisors, former career diplomat and US Ambassador to two countries. He was joined by our Chief Investment Officer, Marcus Brookes. The following is a summary of the insights provided and conclusions drawn.
Lew Lukens described the coming election as “the most consequential US election of our lifetime”, adding that it is about one issue: “you’re either for Donald Trump or you’re against him.”
The polls have been suggesting that American voters are moving against Mr. Trump as his opponent’s lead across national polls increased from seven percentage points to 10.2 in just one month.
The potential for a turnaround is diminishing. “This time four years ago, 14% were still undecided between Hillary Clinton and Donald Trump. This year roughly 3%-5% are undecided”, Lew noted. This makes the polling more accurate, but also makes it harder for the campaigns to attract undecided voters.
Key demographics moving away from Donald Trump
The reason for this shift is clear. Key demographic groups are moving away from Mr. Trump. The first is that of white women in which Donald Trump beat Hillary Clinton by 9 points in 2016, but is currently tied with Biden. “White women didn’t like Hillary Clinton, but they do seem more favourably disposed to Joe Biden” Lew suggested.
Meanwhile, Mr. Trump appears to be losing the traditionally Republican demographic of older voters. He beat Mrs. Clinton by seven points in this category four years ago, but is currently running 20 points behind Mr. Biden.
The reason appears to be that older voters are not happy with Mr. Trump’s response to Coronavirus. According to Lew, “they’re worried about their health and don’t think that he’s taken the virus seriously enough”.
Finally, unlike four years ago, young voters are highly motivated this year. “They are passionate about some of the issues that the Democratic Party is championing, such as racial justice, women’s right to choose, student debt, the environment and climate science.” We saw a shift in this demographic two years ago which helped to give control of the lower house, the House of Representatives, to the Democrats. Lew and his colleagues at Signum, expect to see that trend continue with young voters this year.
The US electoral process
Each state has two senators. It also has a number of representatives depending on how big the population is in the given state. California has the largest state population and, therefore, the highest number of representatives at 53. With the two senators that’s a total of 55 politicians representing California across both houses of Congress.
The party that wins the most number of senators controls the Senate, with the vice president holding the deciding vote in the event of a tie. Currently, the Republicans control the Senate.
The party that wins the most number of representatives controls the house of representatives. Currently, that’s the Democrats.
The race for the presidency is decided not by the popular vote, but by the electoral college. It needs to be explained in steps as follows.
Whichever party wins a state can send its group or “slate” of voters to the electoral college in December to vote for their favoured presidential candidate.
Because California has a total of 55 senators and representatives, the party that wins California sends 55 voters to the electoral college.
By contrast, Alaska has the two standard senators, but only one representative, reflecting the state’s small population. As a result, the party that wins Alaska sends its slate of just three voters to the electoral college.
An absolute majority of 270 votes in the electoral college are required to win the election for president.
A blue sweep?
Current polling would appear to suggest that the Democrats could win a “blue sweep” i.e. control of the Senate, the House of Representatives and the presidency.
If this does transpire, then Mr. Biden would be in a position to push through a good degree of his financial and foreign policy initiatives, but he might not have carte blanche. To get everything he wanted through the Senate, he’d need 60 of the 100 seats, and that appears unlikely.
However, revenue-related legislation such as budget controls, spending and tax policies could be enacted through the annual Budget Reconciliation legislation. This only requires a majority of one in the Senate for it to be passed.
What could we expect from a Biden presidency?
If an additional financial stimulus package is not passed before the election, it’ll probably be Mr. Biden’s first priority, Lew suggested. “Insurance for unemployed, support for small businesses, stimulus cheques for American families and similar measures are likely to be pushed through in the administration’s first year.”
After that, the expectation would be for a new tax plan and an enormous infrastructure programme of $2.5 trillion or more being spent on roads, bridges and so on, but with a very heavy green technology focus.
Foreign policy probably would shift from the more adversarial relations with China, Russia and Saudi Arabia. Lew added that “Mr. Biden is wary of the Chinese leader, Xi Jinping, and would want to maintain an outward policy of ‘American first’”.
As far as a trade deal with the UK is concerned, Lew warned that “a Biden administration would probably bring a six-month delay to proceedings for the simple reason that the new incumbents would want to examine the agreements that their predecessors had negotiated”.
So, instead of something being concluded around Autumn of 2021 under a Trump administration, its delivery date could be nearer Spring of 2022 under Mr. Biden. However, Lew Lukens doesn’t foresee any major differences in the content of the respective administrations’ deals.
Implications for investments
We can expect a substantial financial stimulus package, whoever wins. Mr. Trump has talked about spending $2 trillion, while Mr. Biden’s team has alluded to more than $3 trillion all-told. Aside from the amounts, the way in which the money is raised differs between the two.
Marcus Brookes observed that “Mr. Trump would be more likely to focus on increasing government borrowing and issuing more bonds, while Mr. Biden would offset some of his higher spending by increasing taxes for wealthier corporations and individuals”.
The expectation is that, under Mr. Biden, corporation tax would be taken from its current 21% up to 28%. While that’s quite a jump, it’s still below the pre-2016 rate of 35%. However, “that could knock up to 10 percentage points off profits, which would push stock prices down, especially the ones generating the biggest profits”, Marcus added.
We believe, a Biden administration wouldn’t be bad news for all stocks though. As Mr. Biden’s polling figures have risen, so have the share prices of companies that look set to benefit from his administration. These include utilities, solar stocks, green initiatives and smaller companies that haven’t kept up with the tech giants during the lockdown. Marcus added a caveat to this though: “with so many of these stock price moves already having happened, post-election rises might be limited”.
Whoever wins, the chances are that government borrowing could rise substantially to help pay for further financial stimulus. If the stimulus is successful, then economic growth would be supported and that would be good for stock prices as well as for the prices of bonds issued by companies.
At the same time, the increase in government bonds being issued to help pay for the stimulus measures could push their overall prices down. But Marcus doesn’t see this as a major problem, “there could be some minor loss in value, but the Federal Reserve (the US central bank) is ready to buy bonds as part of its monetary policy, and that would be likely to prevent sharp falls in prices”.
What if Mr. Trump disputes the result?
Finally, Lew believes that this is less of an issue than the media coverage might suggest. “If it’s not decided by the 20 January, then the Speaker of the House becomes the acting president until the members of congress can resolve the dispute.” In other words, Mr. Trump could only refuse to leave the White House until 20 January.
But Lew doesn’t see it coming to that. “While grateful to Mr. Trump for his 2016 victory and some of the legislation he’s pushed through, Senior Republican politicians and sponsors would want to avoid a dispute that inflicts long-term damage on the party’s prospects.”
Any views expressed are our in-house views as at the time of publishing.
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