Four years. It has already been almost four years since the last U.S. presidential election. With November 3rd quickly approaching, we wanted to share some of our thoughts on the election and what a Trump win would mean for the markets versus a Biden win.
While investors have generally remained more focused on the coronavirus pandemic over the last several months, betting markets have recently shifted focus to the presidential election. They expect a Biden victory and potentially, a Democratic sweep of the House and Senate as well.
Let’s look at some of the factors affecting the election.
The 2020 monetary and fiscal stimulus package was the biggest in an election year since 1968, so there are certainly a lot of reasons to believe that the economy should be in a clear uptrend by November. That is particularly important because historically, incumbents have had a clear advantage as long as the economy is performing reasonably well.
However, the important question is: Will past Trump supporters be swayed by his handling of the pandemic crisis, which many believe has led to a longer and deeper U.S. recession than other countries who took a swifter approach?
Trump’s base appears to be rock-solid and will likely turn out. However, based on recent polls, that alone may not be enough for him to garner the votes necessary for re-election. He has an uphill battle with young people and people of color who have been hit particularly hard by the pandemic. Furthermore, college-educated women who have turned away from Trump in recent years will be an important demographic to watch.
Similar to 2016, we believe that a few swing states will determine the outcome of the presidential election. Michigan, Pennsylvania and Wisconsin are the most important swing states to monitor.
Interestingly, Arizona and Florida have also become battleground states, as senior citizens there have expressed displeasure with the Trump administration’s response to COVID-19. In the months ahead, we will be watching the trajectory of the virus and the re-opening process in these states, as they could turn out to be important factors in the election.
Potential impact on financial markets
A Trump Win
In our opinion, if Trump is re-elected, low taxes and deregulation would remain the administration’s top priorities. Investors prefer predictability and continuity and as a result, the impact of a Trump victory on financial markets could be generally positive, but also somewhat muted.
From a geopolitical standpoint, while many are predicting greater isolationism under a second Trump term, we are not so convinced. In our opinion, it is possible that Trump would be more moderate without another election to win.
When it comes to China in particular, the tensions are structural and cross party lines. As a result, regardless of the outcome of the election, we expect the next president to continue to tighten the screws on China.
While Biden’s China strategy may be more pragmatic compared to Trump’s somewhat unpredictable approach, our strained relationship with the country is unlikely to be resolved anytime soon.
A Biden Win
The alternative outcome, a Biden victory, is generally perceived as less favorable by some investors. Trust Point believes that financial markets could live with a Biden administration, if it were also a split congress. This would essentially limit government activity, or “do less harm,” as some say. While the House of Representatives is very likely to remain in Democratic control (80%+ chance based on betting markets), the Senate is a longer shot for Democrats, so this scenario could realistically happen.
A Democratic sweep— the idea that the Democratic Party would gain control of the White House, House of Representatives, and Senate—is more unnerving for some investors. While it is too early to tell if Biden will shift to the left or remain moderate, a “blue wave” could certainly signal the redirection of growth to address inequalities. It would also likely bring fiscal expansion of social programs, tighter regulations, and higher taxes on corporations, investments and high earners (but probably only after the economy is on a firmer footing).
The Bottom Line
Here is the most important point: No matter what the outcome of the election is, it is crucial to remember that long-term investors have historically benefited by ignoring political noise. In fact, over the last 150+ years, there is no statistical difference in returns for a balanced portfolio (60% stocks/40% bonds) under Democratic vs. Republican presidents (see chart below).
So, what should you do? Stay calm, stay the course, and continue to trust the resiliency of the market.
Many factors contribute to market movements, and markets have shown they can post attractive returns through all kinds of political environments and elected officials.
The economy matters more for markets than presidents do for markets, and while presidents can certainly influence the economy for a period of time, they certainly don’t fully and permanently control it.
Trust Point is not affiliated with any political party nor do we promote any particular political candidate(s) or political ideology. Because financial markets can be impacted by the political landscape, which in turn can affect your portfolio, Trust Point offers our commentary. Our communication is based on extensive research including historical data on how the markets have performed in similar environments. We strive to provide our clients value-added content that is neutral and unbiased.
As always, if you have any questions, please contact us at 800-658-9474.
Source: Vanguard calculations based on data from Global Financial Data through 12/31/2018. FAWLELGR 022020. © The Vanguard Group, Inc., used with permission.