WHAT YOU NEED TO KNOW
A LOOK THROUGH HISTORY
When considering the upcoming US election, we think it is worth noting a few general observations from previous ones. They are binary events and notoriously difficult to predict, as relatively small shifts in voter decisions within swing constituencies can significantly impact the outcome at the national level. This is partly why national polls are often unreliable when it comes to predicting the result.
Previous election years in the US have been positive for equity markets but conditions have been more volatile due to elevated political risk. Over the longer term, the economic outlook and company profit forecasts are more important to markets. They are discounting mechanisms and market participants are anticipating the potential outcomes. So any significant political risk will be partly reflected in equity prices, which will then adjust rapidly when the result is announced. If the outcome is inconclusive, there is likely to be an extended period of uncertainty.
A key consideration in addition to who wins the presidential election is which party controls the houses of Congress. If either the Republicans or Democrats control both houses and the White House then the party is likely to be able to pass significant legislation, and there would be some divergence between different sectors within equity markets. However, if no party wins complete control then the potential for change on significant issues is greatly dampened.
Statistically speaking, an incumbent US president is highly likely to retain office for a second term when the country is not in recession. With the advent of the Covid-19 crisis and resulting impact on the economy, the outcome from this election appears highly uncertain. Trump vs Biden is probably not as contentious for markets as Clinton vs Trump, which delivered a surprise outcome. The resulting volatility was initially negative and then turned positive as the market anticipated tax cuts and a lower regulatory burden.
TRUMP VS BIDEN
If Trump is re-elected, the initial reaction is likely to be more market friendly because he will probably keep corporate taxes low and continue or reduce current regulatory policies for businesses. A Biden victory would have three main implications for equity markets.
First, Biden is looking to increase taxes and close loopholes. He has spoken of raising corporate tax rates from 21% to 28%, increasing tax on foreign income from 10.5% to 21% and increasing payroll taxes for higher earners (partly paid by corporates). All these taxes, if implemented, are estimated to reduce aggregate S&P 500 earnings per share by 9% to 12%. Previously, the stock market rapidly rose by approximately 50% of the corresponding Trump tax breaks. So we feel that it is likely to rapidly reprice roughly half the tax burden if the Democrats gain complete control (meaning a 4% to 5% correction is likely).
Second, Biden differs significantly to Trump with regards to climate change. Under Biden, the US is likely to return to the Paris agreement and accelerate its green agenda, leading to significant long-term pressure on large fossil fuel energy companies. Renewables and electric vehicles are the likely winners from this change of direction. Third, healthcare reform is a key policy for Biden with “Medicare for All” reigniting concerns around increased drug pricing pressure for pharmaceutical companies.
There are other areas of difference between the two candidates. For instance, Biden is likely to reduce defence spending and invest more in education. However, the parties both agree on a tougher policy stance against China, as both Republican and Democrat voters have an unfavourable opinion of the country.
Current assessments of potential impacts from a Biden win also need to be discounted for the fact that the Democrats do not agree on the details of tax and healthcare reform. This means actual changes to legislation if they win complete control remains uncertain. In addition, with the current Covid-19 crisis as a backdrop, actual policy changes will need to balance the economic risks.
The most market-friendly outcome is probably one where neither party has complete control because there is then likely to be less change. Predicting the stock market’s reaction to the result is challenging and prices are likely to adapt rapidly when it’s announced, meaning there is likely to be some short-term volatility ahead. Over the longer term, the economic outlook and underlying fundamentals of companies are likely to be more important factors for markets than the US election result.
Globally confirmed cases of Covid-19 have now exceeded 30 million, up from nearly 29 million seven days previously.
The number of new Covid-19 cases in the US is now falling due to the country’s containment measures. Although they have slowed the economic recovery, the impact has been less severe than many expected. Europe is experiencing a similar number of new cases, which has risen lately. The region is likely to continue to implement targeted mitigating measures rather than opting for full-scale lockdowns. Latin America is finally curbing the spread of the virus outbreak, though the numbers are still quite high. Asia seems relatively under control, with the exception of India.
US trends show that containment measures can slow the virus spread without full lockdowns. We believe most countries will choose this targeted approach rather than full lockdowns. This means economic activity is likely to be more constrained when the measures are in place to slow the Covid-19 outbreak. Conversely, activity is likely to resume more fully when daily cases diminish sufficiently, measures are scaled back and economies reopen more fully. We expect this to be the case in Europe in the final quarter of this year.
Our view is that therapeutic improvements are in sight, fostering wider economic reopening. We expect either a vaccine breakthrough and/or better medical treatment over the next several months. Once this happens, the most impacted sectors – those relying on mobility, face-to-face interaction and mass gathering – should be able to recover the lost ground more rapidly.
Daniele Antonucci - Chief Economist & Macro Strategist
Amrendra Sinha - Group Head of Direct Equities
Bill Street - Group Chief Investment Officer
This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document – based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of August 17, 2020, and are subject to change. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down. Copyright © Quintet Private Bank (Europe) S.A. 2020. All rights reserved.