On November 4th we will find out if Donald Trump will win a second term in power or if the Democratic candidate Joe Biden will win and take charge of one of the world’s biggest economic superpowers.
Trump is obviously the market-friendly candidate and, traditionally, investors want a Republican candidate to win but this time around there are some other strange forces in play as a Democrat win could mean further (and larger) stimulus packages for the economy. There have therefore been occasions this year where the market pushes slightly higher when the latest polling data suggests Biden is in the lead.
Longer-term, the equities markets would move higher if an out and out capitalist did win the election. The chart below shows the likelihood that Biden will win the election based on the most recent polling data. At the time of writing Biden is the favourite to win but you must take this data with a big pinch of salt as, just like before the last US election and the EU referendum result, the polls can be horribly wrong.
Betfair currently has the odds of Trump winning at 15/8; that equates to a 34.8% implied probability. Biden meanwhile is 4/9 which is 69.2% in percentage terms. As things stand this seems pretty heavily tilted to the Democratic side.
Being a socialist, Biden may help the economy in such a way as to advantage the workers; possibly this could include more support for workers that have been laid off due to the effects of the coronavirus pandemic. At the moment this is a major stumbling block for the White House and US politicians at large. Both of the main parties have been trying to put together a new plan for the economy for weeks and it seemed like they were very far apart in their aims; the Democrats wanted to inject $2.4 trillion worth of spending whilst the Republicans only wanted around $500 billion spent. Now they are much closely aligned but the ‘will they, won’t they’ saga has been running on for some time and it seems like the odds of a deal being agreed before the election are slim. However, House Speaker Nancy Pelosi (Democrat) sounded in good spirits this weekend saying, “the chances of a deal are slim, but I will never give up hope”.
Moving forward there are broadly some positive impacts that Biden may have on the US economy but we would need to hear from him to confirm these theories. These might include:
A Softer Stance On China
It will likely not come as news to you that Trump has had an almighty conflict with China for some time now. From the infamous trade deal to calling the COVID-19 pandemic “China Flu”. It is hard to see Joe Biden having the same aggressive stance on China that Donald Trump has maintained. Diplomacy may be on the markets’ side if Biden does win election this time round.
Trump Is Super Tariff Happy
Biden may reverse some of Trump’s work on tariffs. This could make globalisation and ease of trade once again at the forefront of the world economy. This is a hugely market positive action as during the tariff era Trump attacked the auto, steel and agricultural industries which had wide-ranging impacts.
At the other end of the stick, tax rises could well be imminent in the event of a Biden win. Biden has proposed taxing capital gains and dividends as ordinary income. This would increase the tax rate from 20% to 39.6% for individuals and couples earning over $1 million. This would therefore mean less disposable income for that social group to spend on goods or investments. The corporate tax rate would likely rise from 21% to 28% and Biden looks set to also establish a 15% minimum book tax as well as put tax increases on international profits.
There are some other very complicated tax proposals from both sides but Donald Trump is in favour of trying to keep things the same as much as possible while Biden’s policy position is looking to increase the tax burden for the wealthy.
With polling accuracy looking as reliable as ever, it is definitely a tough one to call; Biden is clearly expected to win by the pollsters but if there is a shock Trump victory then there could also be a big reaction, both politically and economically. After casting doubt on the legitimacy of the result (in the case of his defeat at least) before the election has even been run, there is a strong likelihood that Trump will not relinquish his power without a fight. He could challenge a Biden victory in the courts and the markets could be hanging on for a while before a decision is made.
Either way, a Democratic win has not always been negative for the markets; when Obama was in power it was all smooth sailing. Although there may be tax rises with a Biden presidency this could well be offset by an easier stance to global trade and improved foreign relations with other major economic powers. With just under a week before we’ll know for sure, the way this election (and year) is going, anything could happen yet!
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