Opportunities and risks surrounding the US elections

 In Articles

The American elections on 3 November are seen as the most important of the current generation. Investors see two risks.

The first risk is that a broad victory for the Democrats will ensure that they gain a majority in both the House and the Senate. With Joe Biden as President, the Democrats can easily make changes: higher taxes, a doubling of the minimum wage, and far-reaching regulation that puts pressure on business results.

The second risk is that, after a neck-and-neck race, the election results will be challenged by one of the candidates, resulting in social and political unrest. The foiled kidnapping of the Governor of Michigan would then be just the tip of the iceberg.

The first risk is a real one. In addition to the increasing burden on business, a Democratic victory may bring about a change in foreign policy that will weaken the US dollar.

The second risk is exaggerated. The American system is designed in such a way that a new president will be inaugurated by 20 January 2021 at the latest. Time-limits are set for litigation to challenge the outcome. The deadlines were also met at Bush versus Gore in 2000. This system has historically survived attacks, deportation procedures, and riots, and that will be the case this time too.

Even after the outcome of the elections, it is not clear how the market will react. In the previous presidential elections, it quickly became clear that Trump would be the next president. Markets initially reacted negatively, but when it became clear that the Republicans would gain a majority both in the House of Representatives and in the Senate, markets quickly recovered.

Only if the entire Congress and the President are of the same colour will it be possible to implement one’s own political agenda. In the case of Trump’s first two years, this meant, among other things, tax cuts and far-reaching deregulation, resulting in a sharp rise in average earnings per share. At the time the Congress was divided, there was also talk of a ‘lame duck president’. In the current highly polarised American policy, it is impossible to legislate for change. There are two exceptions: China and Big Tech. Both the Democrats and the Republicans agree that China must be tackled. China is the enemy or at least a problem. Only the way in which the Middle Kingdom is to be tackled differs. The Democrats will place less emphasis on a trade war and more on human rights. But the Democrats also want to maintain the technological lead of the United States.

The Chinese have fewer problems with a trade war than with measures that may affect the integrity of the territory of the People’s Republic. Next year marks the 100th anniversary of the Chinese Communist Party and, following the further integration of Hong Kong, the renegade province of Taiwan is now on the agenda. The anti-trust cases against the big tech companies are also supported by both the Democrats and the Republicans. The motives may differ, but the outcome is the same. Monetary policy will not change as a result of the election results, but that is mainly because — despite Trump’s efforts — the Central Bank can continue to take an independent position. Monetary policy is ultimately determined by inflation, not by the political colour of the White House.

What can change if the entire government is blue (blue is the colour of the Democrats, red is the colour of the Republicans), are higher taxes, stricter regulation, the destination of public spending, foreign policy, and the financing of health care. In any case, public spending will increase, but even more so among the Democrats than among the Republicans.

Biden wants to invest as much as USD 3.5 trillion, the largest investment programme since the Second World War. He wants to restructure the US economy through green projects to tackle climate change. He is counting on subsidies for clean cars, green buildings, and a boost for public transport. Clean energy, according to the Americans, energy from wind, solar, nuclear, or hydropower, will benefit. In the short term, a decision will have to be taken on the financing of health care, and the outcome of the elections will play an important role in this.

American politics is highly polarised and this is also visible in society. This polarisation started in politics. Under the influence of the Tea Party, the Republicans moved to the right and, in response, some of the Democrats led by Bernie Sanders moved to the left. The result of this polarisation is an incipient pillarisation on the basis of political colour. Republican voters only talk to Republicans and Democratic voters only to Democrats. This pillarisation is visible in the media, in residential areas, and in local organisations and clubs. Trump’s presidency has made a significant contribution to this division of American society. Once Trump has disappeared from the scene, it is quite possible that moderate Democrats and moderate Republicans will seek rapprochement. Thus, a new ‘Green Deal’ in both camps is a good thing. Certainly, when the Republicans retain the majority in the Senate, both parties are condemned to cooperate. In view of the major challenges facing American politics, cooperation is also necessary. A movement towards the moderate middle cannot, therefore, be ruled out.

It is unlikely that the outcome of the American elections will change the direction of the financial markets. Stock markets are rising under Democratic presidents and Republican presidents. Both sides continue to provide fiscal stimulus and, together with the liquidity injections from central banks, this will have a major impact on the financial markets. There is, of course, uncertainty about the outcome of the elections, which may set the markets in motion, but we also know that with the passage of time after 3 November, there will automatically be more clarity. Less uncertainty almost always has a positive effect on the financial markets.

The decreasing uncertainty is also an excellent basis for strong economic growth in 2021. A year in which the impact of the coronavirus will diminish, which could also broaden economic growth. That may also be the time when inflation rises, but as long as central banks keep interest rates low it will be positive for the stock market. Savers and bondholders will continue to foot the bill for the high level of debt, in the form of interest rates remaining too low for longer.

Recent Posts

Leave a Comment

Contact Us

We're not around right now. But you can send us an email and we'll get back to you, asap.

Receive our FREE Strategy Reports 

Select from Alpha, Alternative, Overlay and Compounding; or get them all.