US election countdown: what you need to know

  • George Brown, Economist at Schroder Investment Management
  • 08 December 2023
  • 15 mins reading time

In one year’s time, Americans will head back to the polls to elect their president for the next four years.

Incumbent Joe Biden is seeking a second term and, facing little opposition, is set to win the Democratic nomination. His predecessor, Donald Trump, faces a crowded field heading into the voting for the Republican nomination. But he has established a near 45-point lead over his closest challenger, Florida governor Ron DeSantis. So, while nothing is guaranteed in politics, a second bout between Biden and Trump looks almost certain.

It would not be the first presidential rematch. There have been six in total, with the most recent being Dwight Eisenhower and Adlai Stevenson in 1956. But only one individual has been elected to a second non-consecutive term as president: Democrat Grover Cleveland, when he regained the presidency from his Republican rival Benjamin Harrison in 1892. And this was achieved partly because the Populist party, which won 22 of the 444 electoral college votes up for grabs, subtracted more from the Republican voter base than from the Democrats.

Just as in 1892, it’s possible a third party could disrupt the status quo. Robert F Kennedy Jr recently announced an independent presidential bid, having dropped his bid to become the Democrat nominee. He is currently polling as high as 14 percent, which would be the most for an independent candidate since Ross Perot won 19 percent of the popular vote in 1992, helping Bill Clinton defeat the incumbent George HW Bush in the process. However, the jury remains out on whether Kennedy can maintain his momentum and, if so, whether he poses a bigger threat to Biden or to Trump.

Portfolio performance during Biden and Trump presidencies

It is difficult to predict how different types of investment assets might perform under a second Biden or Trump presidency, as we can only speculate on what their policies would be. But we can compare how markets behaved during their respective first terms.

Let’s consider a diversified ‘60/30/10’ portfolio. This portfolio comprises 60 percent equities (in large US companies), 30 percent bonds (in the form of US government bonds with 10-year expiry dates) and 10 percent cash (comprising US government bonds with three-month expiry dates).

This 60/30/10 portfolio contains a simplified blend of equities, bonds and cash and is used for illustrative purposes only. At Schroders Personal Wealth (SPW), one of our principles is to be well diversified, to not have all your eggs in one investment basket but to hold a range of investments at a level of risk appropriate to you. SPW’s Personal Discretionary Portfolio Service (PDPS) portfolios and Portfolio Funds contain a broader range of equities, bonds and other investments than this 60/30/10 portfolio and so, in SPW’s view, are more effectively diversified. And the percentages held in different asset types vary across PDPS portfolios and Portfolio Funds in line with their risk levels.

As you can see from chart 1, at this stage of his term, Trump had overseen total returns of 35 percent on a 60/30/10 portfolio, in line with other first-time presidents since the early 1970s. But Biden, by comparison, has only delivered 8.5 percent at this stage of his presidency. And this would be lower still if not for the performance of the so-called ‘Magnificent Seven’ of high-growth tech companies, which includes Facebook-owner Meta and Google-owner Alphabet.

Chart 1: Weak market returns since Biden became president

Total returns from a portfolio comprising 60% of equities (S&P 500), 30% of bonds (10-year US Treasury) and 10% of cash (3-month US T-Bill).

Source: Schroders Economics Group, Intercontinental Exchange, LSEG, 27 October 2023.

These figures refer to the past and past performance is not a reliable indicator of future results.

But investors hoping a second Trump presidency might boost returns could well be disappointed. Our analysis shows returning presidents have generally seen lower returns across almost all main types of investment assets (see chart 2).

Chart 2: Most types of investments had lower returns in second presidential terms

Source: Schroders Economics Group, Intercontinental Exchange, LSEG, 27 October 2023. Chart shows performances of the following: large company US equities; 10-year US government bonds; high-quality (investment grade) corporate bonds; CPI inflation and US gross domestic product.

These figures refer to the past and past performance is not a reliable indicator of future results

It is not all bad news, though. Chart 2 shows inflation has historically been lower during second presidential terms, even when excluding the high rates experienced during the Jimmy Carter and Ronald Reagan administrations of the late 1970s and early 1980s. On top of this, national economic output has typically been higher and unemployment lower compared to presidents’ first terms.

Some of these differences in market performance may be partly down to factors unrelated to who occupied the White House. Global economic shocks, such as the energy crises of the 1970s and the 2007-2008 financial crisis, are prime examples of events beyond the president’s control. The same can be said about the pandemic and its aftermath, which overlapped Biden and Trump’s presidencies. Another common feature of their presidencies is they both started their presidencies with control of the legislative branch, or Congress, which comprises both the House of Representatives and the Senate. What looks less certain this time round is whether the winning candidate will be able to secure control of both of these chambers.

Possible legislative roadblock

Of the 34 Senate seats up for grabs, the three that are currently ‘toss-ups’ are all with the Democratic faction in the Senate. As such, a Biden victory could easily see him paired with a hostile Senate. Likewise, Trump may well manage to clinch the presidency but lose the Republicans’ narrow 221-212 majority in the House of Representatives if he were to lose the popular vote a third time. Either scenario would create a legislative roadblock for the president, effectively scuttling their ability to deliver the partisan policies they pledge during their campaign.

But gridlock on Capitol Hill should help support the stock markets. Divided governments are forced to compromise, which serves to moderate the more extreme inclinations of each party, providing a more stable policy backdrop for investors. Since the 1948 presidential election, US equities have averaged total returns of 14.3 percent when a president has had to contend with a split Congress compared to a more modest 13.0 percent increase under a unified government. This divergence is even wider on a party basis; Democratic presidents have seen gains of 18.8 percent under a divided Congress versus 12.0 percent under their Republican counterparts (see chart 3).

Chart 3: Equities often perform better under a divided US government

Source: Schroders Economics Group, Robert Shiller, Office of the Historian, Clerk of the House of Representatives, 27 October 2023. Chart shows combined returns of equities in small, medium-sized and large US companies.

These figures refer to the past and past performance is not a reliable indicator of future results

So, while there is still a lot that can happen before next year’s election, the fact that the contest looks set to be a close one could be good news for investors. Even so, one of SPW’s principles is to invest for the long term, thereby looking beyond short-term events such as the US election. Markets inevitably have ups and downs, but have historically grown during longer time periods.

Need to control Congress

Regardless of who eventually triumphs, victory will not mean much if they fail to take control of Congress, meaning both the House of Representatives and the Senate. All 435 seats of the House of Representatives are up for re-election and, as already mentioned, 34 of the 100 Senate seats will be contested. Each party currently controls one chamber and by the slimmest of margins. This has hampered Biden’s legislative efforts since the start of this year, not least because a minority of ultra-conservative Republican lawmakers have been able to obstruct their own party’s leadership.

Biden has many reasons to be optimistic about his re-election chances even if, at the time of writing, the bookmakers expect Trump to win the presidency (see chart 4). Beyond the incumbency advantage, he is also overseeing a strong economy, low unemployment and sharply easing inflation. And the recent conflict in Israel could also provide some support, as rising geopolitical tensions have historically led to a ‘rally round the flag’ effect.

Chart 4: Betting markets expect Trump to beat Biden

Source: Schroders Economics Group, Betfair, 27 October 2023.

Even so, Biden continues to be dogged by low approval ratings. His popularity is currently near the lowest level of his presidency so far, and below that of many of his predecessors at this stage of their first term (see chart 5).

Chart 5: Biden is struggling for popular approval

Source: Schroders Economics Group, FiveThirtyEight, 27 October 2023.

Part of the reason for Biden’s unpopularity is because immigration has risen up the list of voter concerns. Crossings at the US-Mexico border reached new highs in September amid a large increase in undocumented immigrants from Venezuela.

Polls also show voters hold reservations about Biden’s age. He became the oldest president in history when elected in 2020 at 78 years old. By the end of any potential second term, he will be 86. Trump is just three years younger, but one poll showed only 1 percent of voters considered him to be outdated or elderly, compared to 26 percent for Biden.

Even so, Biden is not as unpopular or polarising as Trump. So moderate, non-partisan voters might ultimately back Biden for a second term, albeit reluctantly.

Could Kennedy’s presidential bid boost Biden’s prospects?

Biden may also benefit if Kennedy’s independent bid can go the distance. Kennedy, a vaccine-sceptic who has tilted towards conservatism since ditching his Democratic bid, may split some of the anti-establishment votes that would otherwise have gone to Trump.

For these reasons, it would be premature to rule out Biden retaining the presidency.

If re-elected, Biden could look to resurrect his initial legislative agenda. His initial Build Back Better proposals in 2021 included $3.5 trillion (£2.8 trillion) of spending on environmental and social programmes, amounting to more than 10 percent of national economic output. But it was trimmed down to $2.2 trillion by the House of Representatives (see Chart 6). It then faced opposition from centrist Democratic senator Joe Manchin, who is at risk of losing his seat at next year’s elections. As a result, it was eventually watered down further to become the Inflation Reduction Act. While the $437 billion of stimulus this included was still sizeable, it was just one-eighth of the original proposals.

Biden may attempt to enact some of the measures that were ultimately dropped, such as funding for subsidised childcare, universal pre-kindergarten or paid family and medical leave. But this could fuel growing concerns about the sustainability of government finances and raise the cost of government borrowing. Investors should also be wary of Biden potentially seeking to raise the top rates of corporation, income and capital gains taxes, and increasing regulation in areas such as banking and healthcare. This might result in an increased pressure to sell equities (shares) in some industry sectors.

Chart 6: Biden could resurrect the unrealised $1.7tn of his Build Back Better Act

Source: Schroders Economics Group, Stephen Semler Speaking Security Newsletter. 27 October 2023.

Trump may be the bookmakers’ favourite to win the election, but he must first secure the Republican nomination. While he is polling miles ahead of his other candidates, George W Bush commanded an even bigger lead, of more than 50 percent, in 1999 and nearly failed to win the nomination. After being roundly defeated in New Hampshire by John McCain, Bush went on to survive a make-or-break battle in South Carolina only to then suffer an upset defeat in Michigan. Finally, he managed to get his campaign back on course to win enough states on ‘Super Tuesday’ to force McCain to concede (see chart 7).

Trump’s well-documented legal battles are also set to keep him off the campaign trail as voting for the Republican nomination gets underway. He is due in court on 15 January for the E Jean Carroll defamation trial, which coincides with the political party meetings in the state of Iowa to select US presidential candidates. And the trial for his alleged efforts to overturn the 2020 election result has been set for 4 March, just one day before Super Thursday, when voting for Republican nominations in 14 states is set to be held. Even so, his strong social media following means Trump won’t necessarily be hindered by his physical absence.

Chart 7: Bush Jr almost lost the Republican nomination, despite having a bigger lead than Trump

Source: Schroders Economics Group, Dave Liep’s Atlas of US presidential election, 27 October 2023.

Assuming Trump is successful in his bid to retake the White House, it is difficult to determine what he would seek to achieve given his reputation for bluff and bluster. According to PolitiFact, he broke just over half of his campaign pledges and only fully delivered on a quarter. And of his nearly 1,000 statements that have been fact-checked, some 75 percent were found to be at least mostly false (see chart 8). Still, Trump’s fiscal pledges this year have been to repeal Biden’s tax hikes, ‘immediately tackle’ inflation and end what he has called Biden’s ‘war’ on American energy production.

Chart 8: Trump’s record of false claims and broken campaign pledges

Source: Schroders Economics Group, PolitiFact, Poynter Institute, 27 October 2023.

When it comes to a second Trump presidency, the only certainty is uncertainty. For one, he could be convicted of a crime and jailed. This could well lead to a lengthy constitutional crisis and perhaps even insurrection. Also, his foreign policies could further isolate the US, particularly if he chooses to scale back sanctions against Russia. As a result, investors should brace themselves for market turbulence, which could result in a ‘flight to safety’ via a rally in government bonds and gold. Investors often consider these to be a safe haven in turbulent times.

Safe haven assets such as government bonds and gold can have a key place in investment portfolios. But SPW believes they need to be held along other types of investment assets, such as equities and corporate bonds, in line with your approach to investment risk and your circumstances.

The author would like to express his gratitude and appreciation to Ben Read, an economics placement student at Schroders, for his assistance in compiling the statistics and graphics used in this article.

This is a revised version of an article published on the Schroder Investment Management (SIM) website on 9 November 2023.

Important information

Schroder Investment Management (SIM) provides investment management and advice services for Schroders Personal Wealth (SPW) funds and portfolios respectively.

This article is for information purposes only. It is not intended as investment advice.

The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors might not get back their initial investment.

Any views expressed are our in-house views as at the time of publishing.

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