The US presidential and congressional elections are set to rock markets
America is not only a country, but also an idea – fashions begin in New York and spread to the world, US values are exported, and as an issuer of the world's reserve currency – the dollar – any change in the US has an outsized impact on all markets. November 3 is the date to circle on the calendar – the first Tuesday of November, as per tradition. Voting and the results are happening while markets are open– contrary to many other countries that go to the ballots during the weekend. The president is elected via the Electoral College system. The candidate that wins most votes in each of America's 50 states and the Capital District of Colombia wins all the electors for that state, with two minuscule exceptions. The total number of elections is 538, and 270 are needed to clinch the victory.
The pandemic and the ensuing economic and urban chaos have moved what seemed to be a sure reelection for Donald Trump to a substantial polling edge for his presumed opponent Joe Biden.
Donald Trump inherited a long-running improving labor market and had no impact on its trajectory.
The election of Donald Trump four years ago not only overturned the Iranian policy of his predecessor Barack Obama but upended the long settled American tolerance for one-sided Chinese trade and industrial practices.
"Kong flu" is President Donald Trump's racist phrase to put accuse China of coronavirus.
MARKETS: HOW THE ELECTIONS WILL IMPACT STOCKS AND THE US DOLLAR
The candidates this year, Republican President Donald Trump and Joe Biden the presumptive Democratic nominee whose official nomination is not until August, are probably the two most unusual competitors since the early days of the Republic two
centuries ago.
Both candidates have high approval rating from their respective parties, President Trump at 85% from Republicans and Biden at 74% from Democrats in surveys from Gallup.
Markets are likely to remain agnostic on the election until
the Fall. The reason is quite simple. Polls this far from November 3 have little predictive value. Short of a change in candidates what happens between now and Labor Day is the preliminary for the main event.
Historically, Republican
candidates and party platforms have been viewed as more favorable to business and markets and better stewards of the economy. That has been changing in recent years with a majority of Wall Street money going to Ms. Clinton in 2016.
The attitude
of the markets to this election and its highly unusual economic, political and cultural landscape and the enormous degree of polarization in the electorate may make a strict good or bad for business analysis next to impossible.
About US RATES
The absolute and sustained decline in Treasury yields and commercial interest rates overall is solely due to the Fed’s revived quantitative easing bond purchases initiated in March. Fed assets have soared $3 trillion in the past three months, almost as much as the $3.5 trillion gain in the six years of financial crisis purchases and the bank has extended its buying to various commercial issues.
Experts have their say
The state of the economy, particularly employment, is historically the most telling condition for a president’s reelection and, therefore, is key for President Trump. Markets have not begun to price the November election and will not do so until the fall, according to FXStreet’s analyst Joseph Trevisani.
The presidential election is over four months away, several lifetimes in politics, yet the temptation to cite contemporary polling and suggest that this time Biden’s lead may mean victory appears to be irresistible. Trump’s defeat has become a ruling passion for many Democrats but the last election is a glaring example of the danger of letting emotions color analysis.
Fox News' polls point to a landslide loss for President Trump – if the elections were held in late June. They are held only in November, and that calls for caution – especially when looking to the recent past when Hillary Clinton led Trump around this time in 2016.
Political Predictions
President Trump’s overall approval rating, a good but not infallible guide to incumbent reelection odds, has fallen from 47.3% in early April to 43.0% on June 21 in the RealClearPolitics (RCP) average as the coronavirus, unemployment and then protests and riots have dominated news coverage for more than three months.
The national average for the election currently gives Biden an 9.5% lead, 50.6% to 41.1% (RCP, 6/21) though polls this far out are not a good indicator for the November vote. Historically a president’s chances for a second term drop as approval falls below 45%.
The Democrats lead in the so-called generic Congressional vote, which asks which party is more likely to get an individual’s vote irrespective of candidates, by 8.5%, 49.0% to 40.5% (RCP, 6/21). Given the voter distribution, any lead above 6% shows a Democratic advantage.
Four political scenarios
1) President Biden, Republican Senate
As mentioned earlier, a return to the normal president in the White House but preventing any radical changes to America's capitalism would serve as a relief to markets. It would likely allow them to advance on higher prospects of closer trade ties with
the world and fiscal support.
While Biden's current lead suggests Democrats have a chance to win the Senate, it could prove a high watermark for the challenger and his party. Therefore, the scenario of a split government is the most likely
one.
A sub-case of this likely scenario would be that Trump refuses to concede, claiming fraud. That would cause a constitutional crisis that would plunge the country into chaos. However, that has a low probability and if he follows such a
dangerous path, other Republicans may push him out, calming markets.
2) Clean sweep for Democrats
Seeing Sanders and AOC setting policy is the nightmare scenario for investors, and would send stocks plunging if it becomes more real. Not only banks and pharma would suffer, but broader equities.
The probability is medium, and it depends
more on how Trump underperforms than anything else. His advisers may help him regain some of the lost Republican supporters.
3) Trump wins, split Congress
In this scenario, Trump edges out another electoral college victory – probably with a greater popular vote loss. Some voters would likely rage, but Democrats would accept the outcome. This option basically preserves that status quo and would cause
markets to shrug off the results.
While Trump would likely continue damaging international relations, he would be unable to move any legislation forward.
4) Clean Republican sweep
This scenario has the lowest probability. Contrary to the Senate – where large and small states have an equal voice – the House is a better representation of the country. Despite Republican gerrymandering, Democrats' lead among Americans will
likely be reflected in the vote for the House, as expressed in the 2018 mid-terms.
Nevertheless, if voters break toward Trump "big-league" as the president says, the voting tickets may boost GOP representatives down the ticket and provide a repeat of the 2016 scenario. While investors may fear Trump's international tirade,
they may find solace in Republican lawmakers' ability to push through their agenda.
U.S. Congress
Americans also elect all 435 members of the House of Representatives, the lower chamber of Congress, and 35 out of 100 Senators, the upper house.
Broadly, the House approves budgets, and the Senate is responsible for nominations.
Major legislation requires agreement between both chambers and the president
Democrats, led by Speaker Nancy Pelosi, currently control the House, with 233 seats. Representatives are voted for a two-year term.
Republicans led by Majority leader Mitch McConnell, currently command control of the Senate with 53 seats.
They are defending 23 and Democrats 12 in the upcoming vote. Senators are elected for six-year terms.
Presidential election years are the pinnacle of political entertainment in the United States. There is more public interest, more press coverage, more voting and this year more polarization than in any election in a generation.
There are also more than the usual number of moving parts. Aside from normal political rhetoric, since the election of Donald Trump more angry and divisive than ever, there have been large protests over racism in many American cities. If that wasn't enough, the pandemic continues to course through society fraying nerves and unemployment is at its highest level since the Depression.
The candidates this year, Republican President Donald Trump and Joe Biden the presumptive Democratic nominee whose official nomination is not until August, are probably the two most unusual competitors since the early days of the Republic two centuries ago.
Without entering the political arena ourselves, we will look at the state of the parties and their relation to the candidates, the view from the financial markets and venture some guesses about the campaign in the summer before its unofficial start on Labor Day.
