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2020 US Elections update

On 3 November we saw several election races take place in the US for both the Presidency and Congress. Democrat nominee Joe Biden has defeated incumbent President Trump and a Democrat majority in the House of Representatives remains likely. The Senate election result is still to be determined.

Key Conclusions

The victory of Democrat challenger Joe Biden in the Presidential race will see a different USA to the one the world has grown accustomed to under the Trump Administration. The focus will be on countering a new surge in the coronavirus pandemic before turning towards rebuilding international relations and promoting key election promises of the Biden Campaign. Overall, the outcome of the Elections with a Republican Senate countering a Democrat President suggests a reasonable environment for share markets as more extreme policies such as higher taxes are now unlikely to occur.

What are the implications of a Joe Biden Presidency?

Domestically it is likely he will push for a more coordinated response against the pandemic. He is also likely to push for additional US government stimulus to offset a new surge in coronavirus cases with Republican Senate Majority Leader Mitch McConnell signalling some willingness to negotiate after months of unsuccessful efforts leading into the election. President Biden cannot push for his more radical campaign promises such as higher corporate taxes without a Democrat Senate. A Republican Senate would be able to block legislation and lead to a “gridlock” situation where the government does not make law without going through negotiations, slowing down the whole process substantially. This would be akin to the inaction that defined the later years of the Obama and Trump presidencies.

Being able to make laws is not the entire story though. Presidents have other ways to promote change. One such area is diplomacy where we believe a Biden Administration will focus on rebuilding relations following years of unilateral action under the Trump Administration. This could see a more tactful approach on China relations although given the China concerns within the US, we think a return to a pre-Trump era of conciliation is unlikely. In addition, through control of Federal agencies, a Biden Administration could still make substantial leaps in environmental policy and defusing trade tensions, both areas of scrutiny under President Trump.

Investment implications

In the near term, financial markets reacted favourably to the election outcome. The prospect of a Republican Senate reduced the risk of higher corporate taxes occurring. This should support business profits and allow for more growth in earnings and dividends as a result.

In addition, investors were trying to anticipate a range of results heading into the election. Previously both sides were reluctant to hand their rivals a political advantage by passing new stimulus ahead of the Election. Now it is more likely that we will get some form of stimulus which will be important for example in supporting consumer spending as the US grapples with a new surge in coronavirus cases. Stronger consumer spending feeds into business profits and is a net positive for businesses, helping to support the share market.

One area that may see pressure is that of bond returns. A new stimulus program would mean more stronger economic activity which usually sees bond prices fall as investors anticipate higher interest rates sooner. The positive Pfizer vaccine trial in recent days accelerated this move as it makes it more likely the world can “go back to normal” sooner, hastening the economic recovery.

Lastly one lurking risk is greater regulatory scrutiny of US businesses. This could mean more regulation for large technology companies such as Facebook or Google. Rising compliance costs and other restrictions may see share prices fall or lag the broader market. Importantly there is a lot on the enforcement front a Biden Administration could work towards even without new laws being passed. One example of what could happen is already underway with an antitrust case by the Department of Justice targeting Google over monopolies in search and search advertising in recent weeks.

The Presidential Race

Joe Biden was heavily favoured going into the Election. This reflected his strong lead in the polls including key States such as Pennsylvania which President Trump had narrowly won in 2016.

The election was marked by several issues:

  • Sizeable polling error that saw, in some States, underestimation of the Republican vote and support for President Trump (a repeat of 2016).
  • A record number of postal votes with over 100 million cast before Election Day, and
  • Accusations of voter fraud and legal fights on this front before and following the Election.

The combination of polling error and tendency for Republicans (compared to Democrats) to vote on Election Day initially gave President Trump a potential winning edge, particularly following his win in Florida. However as key States such as Pennsylvania began counting postal votes the picture changed radically with most of these favouring Biden allowing him to reach the 270-vote mark necessary to win the Election. The Biden victory may ultimately be closer to pollster forecasts with Georgia a likely victory (which would give him a total of 305 votes) and Biden likely to expand his popular vote margin (50.8% as of 10 November) as votes continue to be counted in Democrat strongholds such as California.

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