A FinSec View #20 – US Election Special

US ELECTION SPECIAL EDITION: Friday 06 November 2020

A close race, but it would seem Joe Biden has it.

Yet, with millions of votes still to be tabulated and Trump now calling for counting to stop, exactly when a winner will be declared, is still unclear.

What is clear, is that this time it really seems to matter.

With non-compulsory voting in the US, the historical challenge has always been to convince people to make the effort. Not this election. People have come out in droves to cast their vote, with the country recording the largest turnout in the past 100 years and Biden surpassing Obama for the most votes received by a Presidential candidate in American history. And the records don’t stop there. Only twice in the past 40 years has a president been denied a second term. Never before has a president dared to challenge the US voting system and never before has a candidate outperformed polls in such a way as Trump (are supporters so ashamed they would rather lie to the pollsters than admit they are voting for him?).

A Biden White House will set a wholly new tone. The all-caps tweets for one would go… Yet the unexpected closeness of the vote also means populism in America will live on. It has become clear that Mr Trump’s astonishing victory in 2016 was not an aberration but the start of a profound ideological shift in the Republican party. Far from being swept away in a blue wave, Republicans have gained seats in the House and will most likely retain the senate. A scenario with a split government is now highly likely.

This is where we need to disentangle the White House and Congress.

The president controls U.S. trade policy and can also guide the regulatory agenda. In this regard, a Biden victory is thought to support non-U.S. equity markets (particularly in Asia), as he is expected to take a more predictable and multilateral approach to Sino-American policy. In terms of regulation, Biden has emphasized the importance of the environment, which could be a moderate headwind to the domestic energy sector. Meanwhile, both candidates have talked about stronger antitrust enforcement of mega cap technology companies. Democrats seem a bit more enthusiastic about this issue and so a Biden win would likely be viewed as a negative for technology stocks.

The control of Congress, meanwhile, is arguably more important than the presidency for the macro-market outlook. That’s because Congress controls the power of the purse, both taxes and spending. With gridlock around a new fiscal stimulus package in the U.S., a unified Congress (where the Democrats win the Senate) should deliver the most fiscal stimulus in 2021. Enhanced unemployment benefits, household checks and additional funds for small businesses and dislocated industries would likely total $2 to $3 trillion. These would provide even more support for an economic recovery that has surprised most economists to the upside thus far.

This could be somewhat offset by tax policy, however, with Biden’s proposal to unwind half of Trump’s corporate tax cut, likely subtracting 5 or 6 percentage points from U.S. earnings growth.

Finally and the most likely scenario at this point is a divided government, where Republicans retain control of the Senate. This scenario would likely stifle both tax and fiscal stimulus efforts. However, a Biden presidency would mean more measured foreign policy. Again, this would be a mixed bag for equity markets.

Markets across the globe have reacted well to the election results thus far. Investors are seemingly buoyed by the prospects of a potential Biden presidency and a Republican senate. This said they seemed buoyed no matter what! On Monday/ Tuesday the Dow soared 1,000 points on hopes of Blue Wave stimulus, only to be hit by a big wave of Republican red. It chose to see this as a positive as well, soaring another 1,000 points on Wednesday/ Thursday . Commentators are calling it the “Tails I Win, Heads I Win” market.

Our view.
A protracted period with no known result could inject volatility into financial markets. What we still see that perhaps the cheerleaders don’t is the ongoing public health crisis and no vaccine in sight. Politics may offer plenty of surprises, but there are some very powerful economic forces already at work that don’t care at all about who is in the White House.

With markets looking so buoyant it is easy to forget that the U.S. and global economy are both still in the early innings of a new cyclical expansion. A fact that illustrates just how far we have to go is Australia’s baseline for business liquidation. According to ASIC when things are ‘normal’ it is around 8000 a year. In 2020 the year of COVID, it will be less than half this. Stimulus is keeping 1000’s of zombie companies alive … the path back to normal will be a long and arduous one.

Regardless of the election result there’s no denying that Donald Trump has amassed a loyal army of supporters over the years, the broader questions are who are they and why does he appeal to them?

The big divide
According to the Federal Reserve Board when it comes to America the top 1% of the population own as much wealth as the bottom 90%. And, 17 times the wealth of the bottom 50%. That is an incredible wealth disparity and one which Trump is a master at leveraging.

Using the theatrics of the media (mainstream and social) his pledges to “drain the swamp” and “make America great again” have become the catch cry of people who feel broken and let down by a political system they perceive has failed them for generations.

For those interested in the rise of Trump and populist politics in general, we recommend a flashback to our 2016 US Election commentary ‘In Hindsight Hilary Didn’t Stand a Chance’.

To finish, a clip of Bernie Sanders that will leave you speechless.

On October 23rd, Tonight Show’s Jimmy Fallon asked Sen. Bernie Sanders how he believed the election would play out. His prediction: the large numbers of mail-in ballots would prematurely skew results in states where counting was not allowed until after Election Day. When those ballots began to show Biden winning, Sanders warned Fallon, Trump would claim fraud. Needless to say this 3 minute clip has gone viral.