Top Of Mind

The US presidential election, to be held on 3rd November, remains top of mind for investors this week.

The topic has only become more relevant with President Trump and the First Lady testing positive for COVID-19 last week. As always, the focus of investors will be on the market implications of both events.

Biden Ahead In Polls

It is now clear that Democratic nominee Biden is well ahead in the pre-election polls. According to FiveThirtyEight’s Nate Silver, the two post-debate polls put Biden in the lead by 9-13 percentage points. This suggests he won the debate. Drawing on analysis from Jonathan Wilmot, who in turn uses the results of a recent FiveThirtyEight/Ipsos poll about which candidate is better on which issue, it becomes clear why Trump is currently losing this election. It’s a five-letter word – COVID.

A simplistic, but probably accurate, conclusion is that absent the pandemic, Trump would probably be well on his way to victory. The single biggest factor that could improve his re-election chances would be a big shift in the public’s perception about who would be better at dealing with the pandemic. Therefore, the way to look at Trump’s COVID-19 infection, or any new twist and turn for that matter, is through this lens.

Would a Biden presidency necessarily be bad for economic growth, as some commentators seem to suggest?

Paul Krugman, a winner of the Nobel Prize in Economics, looked at the GDP growth per head in the US during the terms of the last six presidents. Ronald Reagan (Republican) and Bill Clinton (Democrat) tied for the top spot with 2.5% growth per annum. George Bush Snr. and George Bush Jnr. (both Republicans) came in with less than 1% per annum. Barack Obama (Democrat) and Donald Trump (Republican) both came in at roughly 1.5% per annum, pre-COVID-19.

In short, it is not clear that investors must immediately take fright should Biden win the White House. Market participants are also worried about a Democratic sweep – a situation where the Democrats control both the White House and Senate. The most direct consequence of a Democratic sweep on US stock market profits is the likelihood of corporate tax reform. This is perceived to be negative for profits. On the other hand, a large increase in fiscal spending by the Democrats would boost economic growth and help offset the earnings headwind from higher taxes.

More Important Factors At Play

While it is widely believed – by both voters and observers alike – that this election is the most consequential to date, there are other more important factors at play that drive equity valuations in the medium-term. They are: (i) the status of a vaccine, (ii) the path of the economic recovery, and (iii) monetary policy. If investors remain relatively optimistic on these three drivers, there is a case to be made for holding a meaningful allocation to equities.