A not so straightforward US election
Four possible scenarios in the 2020 contest
Amid all the drama in the US presidential race, it is easy to forget that elections for the Senate and House of Representatives (frequently referred to as the House) are also taking place concurrently. Nevertheless, these lesser-discussed elections will prove important in understanding any US post-election scenarios. A clean-sweep for either the Democrats or Republicans would give Joe Biden or Donald Trump respectively a far more powerful hand to achieve change. However, divided scenarios, whereby the winning candidate does not command control of both the Senate and House, can significantly restrict their ability to implement new legislation.
According to opinion polls, a Republican-controlled House seems an unlikely possibility, so we turn our focus to four main scenarios:
#1) Status quo - Donald Trump as President and Republican control of the Senate, but the Democrats retaining a House majority;
#2) Clean-sweep - Joe Biden winning the Presidency and both the Senate and House;
#3) Divided Biden scenario - Biden winning the Presidency and House, but not the Senate;
#4) Disputed election - votes in some states are too close to call and it takes a long time to resolve.
For investors, the main issues are over corporation tax, government spending and regulation. Biden looks set to reverse some of Trump’s corporation tax cuts but increase spending, while Trump has promised a new round of deficit-funded tax cuts for individuals. Trump will almost certainly continue to roll back regulation, while Biden has promised new workplace and environmental regulations. On fiscal spending, Biden has pledged to spend big (US$2trillion) on green projects, which remains unlikely under Trump.1 Neither is expected to significantly roll back the pressure on China, but Biden’s approach may be more political than economic.
Assuming there is a clear result, the status quo (Senate and presidency, the #1 scenario) is looking increasingly less likely according to the latest opinion polls, but Trump often benefits from ‘silent majority’ voters and so this remains a possibility. This scenario would probably be most favoured by markets because it would mean keeping lower corporation tax levels and less regulation.
A Democrat clean-sweep (presidency, Senate and House, the #2 scenario) may leave stock markets unsettled while they assess the lie of the land. Sectors such as energy, financials and technology may struggle whilst green technology may advance.
A divided scenario (presidency and House, but Republican Senate, the #3 scenario) could be more neutral to slightly negative for stock markets. As President, Biden can wield considerable power in some areas through the appointment of officials and executive action, but would be unable to enact significant new legislation.
The worst-case scenario for markets would undoubtedly be the disputed election (scenario #4). Donald Trump has already made it clear that he will not go quietly by expressing his significant concerns over ‘mail-in voting’ and his refusal to commit to a peaceful transition of power. Counting mail-in ballots is time-consuming and most states are ill-prepared to deal with the large increase likely as a result of COVID-19. At the time of writing, over 14 million postal votes have already been cast2. According to a Democracy Fund survey, more than one-third of Americans intend to vote by mail in this November’s election, with Biden voters twice as likely than Trump supporters to vote in this way3.
States also have different rules for assessing the validity of a ballot paper. Mail-in ballots may be lost, not counted or rejected because voters are unfamiliar with verification requirements. This is very likely to lead to contested and delayed results. Postmarks could end up being the new “chads” from 2000, which caused significant controversy over what standard of ballots were to be admitted in recounts in Florida.
If the result in individual states still isn’t clear by the so-called “Safe Harbor” date of 8 December, state legislators may set aside the popular vote and exercise their power to choose their representatives directly. This may not always give the expected result: for example, the head of the Pennsylvania Republican Party suggested that the state’s voters may not end up picking the state’s choice for president in November. In other words, it could be extremely complicated.
The President, unless re-elected, cannot remain in office beyond 20 January 2021, when his term ends. If there is no result, one outcome would be for Nancy Pelosi, the Speaker of the House and a Democrat, to become acting president. This would create a level of uncertainty that could cause significant disruption in markets. The last time an election was disputed was in 2000, between Al Gore and George W Bush, and the stock market was unsettled in the month it took to get a result.4 This dispute could take longer and see even more disruption.
While recent polls suggesting a strong probability of a Biden victory have likely contributed to stock markets’ recent relative resilience, this is only one possible result out of many scenarios, including the possibility of a disputed election. Global stock markets are certainly not immune from turmoil in the White House, and there is the potential for significant short-term volatility.
1 Biden announces $2 Trillion Climate Plan, The New York Times, 11 August 2020
2 More than 14 million Americans have cast ballots in early voting so far: analysis; The Hill, 14th October 2020
3 Biden voters twice as likely than Trump supporters to vote by mail in November, survey finds; USA Today, 18th August 2020
4 Refinitiv Datastream, calculations by Smith & Williamson Investment Management LLP, 14 October 2020
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Please remember investment involves risk. The value of investments and the income from them can fall as well as rise and investors may not receive back the original amount invested. Past performance is not a guide to future performance.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.