This year’s US election threatens to be one of the most contentious and bitter in recent memory. In ordinary election years, investors tend to take a more conservative approach to the markets, based on the uncertainty of who will prevail. This year, the election is coupled with the US government’s response to the Covid-19 outbreak, and the effect that has had on US public debt.
In this article, we look at five potential scenarios that could play out between now and November, and ask market observers and participants what they think each scenario would mean for the stock market.
A Democratic sweep
Most polls have Democratic presidential candidate Joe Biden leading President Donald Trump nationally. If Biden is victorious and Democrats sweep both houses of Congress, the market would probably react negatively, at least in the short term, according to market observers.
This is because of the uncertainty associated with any new administration. There is, however, a sense that the market has begun pricing in this scenario.
‘The leadership coming out of the White House has not been particularly seen as positive by a lot of people,’ says Robert Jenkins, global head of research at Refinitiv Lipper. ‘I don’t think a Biden win will mean a massive sell-off – because the market is already starting to think that will happen.’
Sam Stovall, chief investment strategist at CFRA Research, says a Democratic victory across the board has historically led to an average market decline of 2.5 percent in November, and this has happened five times since the end of World War II. After the initial shock, however, the market has managed to recoup gains by year’s end.
‘[When this happened before] investors were alarmed by the sweep because Wall Street does not like uncertainty,’ Stovall says. ‘That quickly goes away, though, because December was positive in every instance after that. In the subsequent calendar year, the market was higher by 10 percent and rose in price about 80 percent of the time.’
Allison Schrager, economist and senior fellow at the Manhattan Institute, says Biden and his running mate, California Senator Kamala Harris, seem less ideological and more pragmatic than other potential candidates, but a sweeping Democratic victory in November could lead to the implementation of more left-wing policies that would be detrimental to financial markets.
From current messaging, however, nobody is expecting anything extreme from a Biden presidency. ‘If we had a President [Elizabeth] Warren I would expect markets to crash, but Biden is not proposing anything extreme,’ Schrager says. ‘They might drop for a day or so, but markets have already priced in a Biden victory.’
This is an extract from an article that appeared in the Fall 2020 issue of IR Magazine. To continue reading, click here to open the full digital edition of IR Magazine