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20.10.20

The US Election – Part III

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With a matter of weeks before the US Presidential election, in our third and final part of 3 scenarios we look at a disputed result.

A disputed result – the worst possible outcome

America has a federal system, which means that each state has its own rules around elections, in terms of how votes are cast and crucially how they are counted. The 2000 election is a prime example (remember the ‘hanging chads?’), but maybe 1876 offers an even more extreme portent of what might be coming down the tracks. It is possible that the result may not be known in the days after the election and it could eventually go to the conservative majority Supreme Court.

If the result looks too close to call and if Trump ramps up the rhetoric about mail-in ballot fraud and we see examples of voter suppression, then we can expect to see increased volatility across the financial markets and not just in the USA.

Back in 2000, George W Bush used legal arguments to stop recounts in Florida – Trump might use other methods. A disputed election, particularly where the incumbent refuses to accept the result, would be by far the least palatable of results for the market.

What Does History Say?

Markets tend to perform best when the party in the White House has some opposition in Congress. Markets like moderation and between 1950 and 2017 the two best-performing combinations for the S&P 500’s performance were: a Democratic president with a Republican-controlled Senate and a Democratic president with a Republican-controlled House.

From 1952 through to June 2020, annualized real stock market returns under Democrats have been +10.6% v +4.8% for Republicans, but whilst the data shows this, it does not prove cause and effect. Clinton had the best returns, George W. Bush and Nixon the worst – but it is a big leap to claim that the market returns specifically reflected the policies of the President. Whilst historical correlations are interesting, they are not predictive.

Biden remains sufficiently ahead in the polls that a Biden victory remains the most probable outcome. Biden’s stated policies, if enacted, would doubtless impact sectors like health care, energy, industrials and materials. There are some general winners, like companies with large exposure to sustainable energy, and losers, like pharma stocks selling drugs to Medicare at large mark-ups. But as ever, it comes down to policy specifics and what can get passed. In that sense, the Senate results may have just as much of an impact on markets as the race for the White House.

Chris Salacinski
Director & Financial Planner

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