Interactive Investor

US election result: the outcome no one wanted

4th November 2020 08:07

Rodney Hobson from interactive investor


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Hours after voting ended, the world still waits to hear whether Biden or Trump is victorious.

The United States has woken up to the result that no one really wanted: no result. Four years ago, Hillary Clinton conceded defeat at around 7am UK time when Donald Trump passed the magic mark of 270 seats in the electoral college. This time we could wait for several days or even weeks for an outcome.

The worst scenario for investors is a narrow win for Joe Biden that is challenged by Trump. This would create maximum uncertainty. There is a precedent for this happening. In 2000 the election eventually hinged on the result in Florida. Despite winning most votes nationwide and, arguably, most votes in the electoral college, Democrat Al Gore did the decent thing for his country and conceded to Republican rival George W Bush. It is unthinkable that Trump will be magnanimous in a similar scenario.

Trump can cause a lot of disruption over several weeks by challenging results in individual state courts as well as through federal courts. However, the issue would be escalated quickly to the Supreme Court.

A narrow win for Trump could also be challenged by Joe Biden who is said to have lawyers waiting. However, Trump has a specific cause to challenge the result in courts as he has consistently complained that postal votes have been cast fraudulently. He can also challenge those states that accept postal votes after the polling booths closed. Biden has no specific case to pursue.

In theory, Trump would have an advantage since six of the nine Supreme Court judges are conservative and three of them have been appointed by Trump himself. While they may baulk at thwarting the will of the electorate, they will have some leeway to be swayed by their personal views, as they were 20 years ago.

There is a clear pecking order in the constitutional arrangements for the US presidency: the president; the vice-president who is also Speaker of the Senate; and the Speaker of the House of Representatives. If Donald Trump persists in disputing a Joe Biden win and the issue is not resolved by the swearing in ceremony on 20 January, then Trump risks the presidency going to the House Speaker by default. 

That would let Nancy Pelosi, a Democrat and bitter opponent of Trump, in by the back door. Trump may despise Biden, but he does not hate him. He does hate Nancy Pelosi. This would provide the perfect excuse for Trump to back down and allow a Biden presidency. 

Of Biden and Trump, the choice of investors should be narrowly for Trump despite his unpredictability. News that he was faring much better than expected in the polls sparked a rise in the dollar on Asian markets. A continuation of his presidency would be seen as less economically disruptive despite his divisive nature.

Trump is admittedly no genius when it comes to running the economy. His immediate predecessor Barack Obama inherited the financial crisis of 2008. Trump took over an economy that was already motoring.

Both contenders would add considerably to the national debt, a policy that will help the economy now and leave a burden for whoever wins in 2024. Trump will reduce taxes; Biden will increase spending and taxes, which could drive away wealth creators.

There is a fear that Biden will be held hostage by left-wing Democrats who threw their support behind him. However, all US presidents are constrained by Congress, even when their party controls both houses. The US constitution is deliberately framed to prevent too much power being concentrated in too few hands. 

In any case, the US financial sector has poured millions of dollars into Biden’s campaign coffers. He owes Wall Street as big a favour as he does the left wing of his party.

Biden is 77 years old. He is unlikely to run for a second term, so may not feel forced to return many favours. 

Whatever the eventual outcome, the immediate future looks reasonably promising for the US economy despite the wide spread of Covid-19. There was a big bounceback in the third quarter that recovered most, though not all, of the unprecedented slump in the second quarter.

Some sectors are obvious ones to avoid. Airlines and cruise lines have suffered from travel restrictions in too many countries. Hotel chains have seen a dramatic drop in custom that will not be recovered easily.

Aircraft manufacturer Boeing (NYSE:BA) was already suffering from problems with its 737 Max before Covid-19 struck. It made a loss of $466 million in the third quarter and the dividend is under threat. Defence sales will probably hold up well but they account for only 25% of revenue and 13% of operating profits.

Pharmaceuticals will do well even if they produce a Covid-19 vaccine that is sold at cost. The ageing population in developed countries will keep demand for their products rising.

Makers of household goods have had a good crisis and have defensive qualities. Their products will always be in demand. Supermarkets tell a similar story. So do food producers. Fast food chains could thrive as restaurant customers switch to the safety of eating at home, as they are obliged to do in the UK and several other countries.

Despite this summer’s disruption, US housebuilding has continued to grow. This was the sector that sparked the 2008 crisis and it still has some leeway to make up. The American economy is strong enough to keep the demand for housing going despite a rise in unemployment.

US banks are harder to call. They have much stronger balance sheets than they had in 2007 and will come through the coronavirus setbacks relatively unscathed but they could see loans turn sour in sectors that are hit by economic difficulties arising from lockdowns.

Manufacturing, the bombed-out sector that propelled Trump to victory in 2016, is booming. The main problem is an inability to meet fast recovering demand for items such as vehicles and household goods.

Energy is the area that will depend most heavily on who eventually emerges as winner. Trump has been sceptical on climate change and has lacked enthusiasm for a global agreement on climate control. Fracking has taken off during his presidency and made the US self-sufficient in oil. Biden is a keen supporter of green energy.

Naturally, the potential of various sectors or individual companies may already be reflected in share prices. Both the Dow Jones and S&P indices have fully recovered the sharp drops suffered in and around March.

However, the post-election period could be quite choppy unless a clear, undisputed winner emerges quickly. There could be some tempting buying opportunities before the presidential winner is confirmed.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.


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