Why “Who Wins” Matters to Markets
Author: Kevin McCreadie
October 9, 2020
After a long, grueling and often controversial campaign, the U.S. presidential election is now less than one month away. AGF’s CEO and Chief Investment Officer discusses some of the potential outcomes and weighs their market implications as the race for the White House hits the home stretch.
The U.S. election is now less than a month away. What is the outcome that presents the biggest risk to investors?
President Trump’s COVID-19 diagnosis has obviously become a huge concern over the past week and his return to the campaign trail is bound to create noise for the markets as we grind toward the election. For now, the President trails in the polls by a wide margin, however, were the polls to tighten again, the potential of a contested election result would almost surely become the biggest risk facing investors—one that can’t be ignored. Trump has made it clear time and again over the past few weeks that he believes mail-in ballots will lead to thousands of fraudulent votes being cast and said during the first presidential debate that he would not concede the election if he believes the results have been manipulated. Of course, whether it comes to that will largely depend on how the vote shapes up down the stretch. For instance, Trump is more likely to dispute a slim margin of victory in Joe Biden’s favour than he is an outright landslide, but it’s unclear how wide that gap must be for the President to accept defeat without contention. Regardless, investors need to prepare for the possibility of an extended period of market volatility much like was the case when the Democrats contested the narrow election of President George W. Bush over Al Gore in 2000. In fact, this time could be even more tumultuous given how deeply divided the U.S. electorate is now compared to then.
Eventually, even if there is a disputed election, a winner will emerge. How might markets react to the various result scenarios that could still play out?
There are still several viable outcomes in play, but investors can safely rule out a Republican sweep of the White House, the House of Representatives and the Senate at this stage in the race. It’s just too much of a long shot given the stranglehold the Democrats have on the House. On the other hand, a Democratic sweep is a very real possibility and may be what scares markets most over the longer term. In the near term, immediately after the election, investors may take comfort in the massive fiscal stimulus that many believe will result from a Democratic “Blue Wave” victory and rally markets higher because of it. However, under this scenario, Biden would have a much easier time passing legislation to raise taxes just as he’s promised throughout the campaign. And, more than that, there is some worry that a sweep of this kind could lead to more radical left-leaning policies and/or regulations that would negatively impact sectors of the economy such as financials, for instance, or the fossil fuel industry and upset the current status quo which, rightly or wrongly, has greatly benefited many investors over the past four years.
And what if there’s more of a “mixed bag” election result?
Markets would be relatively content with the Democrats and Republicans continuing to share control in Washington, but the best setup for investors might be a Biden victory combined with the Democrats keeping the House and the Republicans maintaining the Senate. This would provide the checks and balances required to alleviate some of the concerns associated with a potential Democratic sweep and could even quell some of the turmoil that has been a hallmark of Trump’s time in office. That said—and as already intimated—markets would also likely react positively in the event Trump is re-elected and the Democrats and Republicans hold their positions in Congress. However, that may not be the case if Trump wins re-election and the Democrats take both the House and the Senate. Such a scenario wouldn’t be deemed as bad as a Democratic sweep perhaps, but it could limit many of the pro-market tendencies of President Trump that markets have come to rely on. Depending on how wide a margin in the Senate the Democrats would have, it may enable both houses of Congress to override the President and enact less-than-market-friendly legislation.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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