Trump or Biden... implications for the markets

Supporters of President Donald Trump gather for a campaign rally at Opa-Locka Executive Airport on Sunday, just hours before voters go to the polls in the US

OVER the last few weeks and months there has been huge speculation over the outcome of the US Presidential election, which has significance not only for the US but also for the rest of the world.

The run-up to the election has been somewhat fraught with accusations of mishandling of the pandemic (and indeed a failure to take it seriously) as well as violent protests mostly around racial tensions.

It has been said that it is one of the hardest elections to predict: indications have been favourable to Joe Biden, but after the unpredictability of the 2016 election, this seems far from certain.

On Wednesday last week we saw a market reaction downwards and over the week as a whole all three US indices tumbled - the S&P 500 was down 5.6 per cent on the week, the Dow Jones was down 6.5 per cent and the Nasdaq finished 5.5 per cent lower.

The theory is that if stock prices rise in the final three months of an election campaign, then the incumbent party wins. As with any theory, there are exceptions and predicting the winner in such a close contest is fraught with danger.

Perhaps the market had been pricing in a Biden victory for a while and the anticipation of more financial stimulus led to higher asset prices; thus, the sell-off could have been because people started to believe that Trump could still win. Under President Trump the stock market has flourished, rising by more than 12 per cent at a time when many thought it was overvalued.

The potential impact on the market is complicated by not only who is elected President but also by which party controls Congress. It is generally agreed that if the status quo remains, it will be positive for equities due to the continuation of the low tax/regulation regime.

Corporation tax should remain at 21 per cent and there could well be a new round of tax cuts. Contrast this with Mr Biden’s stated intention of increasing corporation tax to 28 per cent and increasing spending funded by debt.

However, there are different implications if Joe Biden wins, but the Republicans have a majority in the House of Representatives (likely to be positive for green technology and risky for large tech and financials), whereas a Democratic clean sweep would lead to more uncertainty. Probably the worst scenario would be a disputed result.

Mr Trump has indicated his unwillingness to accept an adverse outcome and this uncertainty would inevitably have a negative effect on the market.

There is a huge amount of attention on the election and a swift result is not a foregone conclusion. Taking several steps back, however, whilst all this may appear critical, on a long-term basis such events look like blips and the market is more heavily influenced by economic concerns.

The impact of the pandemic is likely to be far-reaching, not only because of the pressure on sectors of the economy such as retail, leisure and travel but also because of the acceleration of trends such as working from home and the implications for healthcare.

Cathy Dixon is a partner at the Belfast office of Smith & Williamson Investment Management. This article does not constitute a recommendation to buy or sell investments and the value of any shares may fall as well as rise.

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