We run through three scenarios and highlight the stock market winners and losers.
On 3 November, Americans will head to their polling booths to vote on whether to give Republican Donald Trump another term as US president or instead elect Democrat hopeful Joe Biden. As the world’s largest economy and largest stock market, this is not an event investors can ignore.
What are the potential outcomes?
The first point to make is that while the US presidential election will be the headline event, it will not be the only thing Americans are voting on during the election. A portion of seats in the US Senate (the upper house of the US legislative branch) will also be up for election. Fran Radano, manager of the North American Income Trust (LSE:NAIT), one of interactive investor’s Super 60 funds, notes this means “the outcome is not bifurcated, there is a third avenue.” So, the question is not just who will become president, but who will become president and what will the senate look like?
Broadly, there are three scenarios we should consider:
1) Trump wins with Republicans in control of Senate and Democrats in charge of the House of Representatives.
According to Kevin Boscher, chief investment officer of Ravenscroft, this scenario can be seen as the status quo prevailing. He notes: “Trump would continue with his current policies targeted towards market friendly tax cuts, regulatory easing and business on-shoring, although this would be partially offset by growing China bashing and trade concerns.”
In this scenario, Radano sees two sectors potentially benefitting.
First, financials. Radano notes that following the 2008 financial crisis, the Obama administration introduced a lot of new regulations on banks and financial institutions. This hurt the profitability of US banks. However, under the past four years of Trump, many of those regulations have been rolled back. Should Trump secure another term in office, he will likely continue with this agenda, which should help further boost the price of bank shares.
Another key sector likely to benefit will be energy – particularly fossil fuels. Rodano notes that while there is a secular trend towards renewables, Trump will likely instead focus on boosting the US’ fossil fuel production. For example, fracking will be allowed to continue on federal lands, while further restrictions on where oil companies can drill may be lifted. Trump will also likely allow for further oil and gas pipeline construction.
2) Biden wins - The Democrats control both houses of Congress
The second scenario to consider is a Biden full sweep in which not only does he win the presidential election, but his party also gains control of the Senate.
Boscher views this as potentially the least favourable outcome for markets, saying it could mean large tax increases and generally tougher regulation.
In particular, financials could end up doing worse. A sweep for Biden and the Democrats would likely result in more regulations of banks, hurting their bottom line and share prices. In particular, notes Radano, you should expect an increase in consumer facing regulation.
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Biden will also likely be negative for energy stocks. Radano notes there is the possibility that a Biden administration will force through the elimination of fracking on federal lands. Although such fear may already be priced in. “Regardless you’ll see more regulations on energy, with the sector becoming a much smaller part of the indices,” Radano says.
However, it is not all bad. It is generally accepted that infrastructure is a potential winner of a Biden and Democrat victory. There is a broad consensus in the Democrat Party the US needs a large infrastructure upgrade. Trump’s attempts to do this have, so far, amounted to little but with Biden in the White House and the Democrats in charge of both houses, the likelihood of passing a large infrastructure spending plan increases. Radano says that the construction of highways and railway lines should benefit the industrials and materials sectors. However, infrastructure spending will also likely include spending on parts of the new economy such as internet and renewable energy infrastructure.
Another sector to benefit may be consumer discretionary. “Low wage earners should benefit in a Biden sweep,” says Radano. He argues that the result will likely be a new, higher federal wage as well as a more generous welfare system. As a result, the spending of lower income Americans will likely increase, which is good news for the companies they chose to spend their money with.
The outcome on other sectors is not so clear. Many cite tech stocks as potentially under threat in the event of Democrat win, due a growing sense that the tech giants have become too big and need breaking up.
Rodano, however, is not too worried about this. Although he does note that tech companies will likely see increased scrutiny over their complex tax arrangements and potentially face increased regulation. Boscher has similar concerns.
However, Rodano says while more taxes and regulation may act as a drag on the sector, he still believes tech companies are in a good position on a “secular basis”.
3) Biden is elected but the Republicans retain the Senate
The third likely scenario is Biden is elected but the Senate remains under the control of the Republicans. For many, this is a favourable outcome as it means Biden will be constrained by a conservative Senate that will be unlikely to endorse some of his potentially more un-market friendly plans. Rodano says that Republican control of the Senate would create a “firewall” for the Biden administration.
Boscher summarises his view of the outcome as: “A split government of this sort would potentially be good for markets since investors would benefit from increased fiscal spending, a more predictable trade and China policy and an effective continuations of Trump’s tax policy, although regulatory costs would increase.”
A key point here is that it might constrain Biden’s power to only those policies that can be decided at the presidential level, with the veto of Congress. For example, Biden may still be able to stop fracking on federal lands even without the support of Congress.
However, under this scenario, potential tax increases could be out of the window, as a Republican controlled Senate is unlikely to let such measures go through. However, it could also mean spending on infrastructure is delayed.
China trade war?
One of the defining features of the Trump presidency has been the trade war with China. Prior to the pandemic, escalating tensions between China and the US was one of the biggest concerns of markets in 2018 and 2019. So it is important whether or not Biden will continue in Trump’s footsteps in this regard.
Generally, the consensus is that the US and China are now locked in a new period of ‘great power’ competition. Even with Biden in the White House, that will not fundamentally change. The days of the US and China having friendly(ish) relations are now gone.
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Trump’s line on China is one of the few things he has been able to gather some praise from Democrats on. And indeed, prior to Trump, those spearheading attempts by the US to challenge China were often Democrats.
However, a Biden win may bring some changes. First of all, Biden’s rhetoric might ease the situation somewhat. Just as much as his policies, Trump’s supposedly inflammatory rhetoric regarding China has been seen as worsening tensions. Biden, some hope, will be more conciliatory.
Another aspect is that Biden may attempt to repair relations with other trading partners. As well as pursuing a trade war with China, Trump has also threatened the trading relationship between the US and both the European Union and Mexico, among others. Geopolitically, he has also alienated many countries. Improving relations with many of these states would allow for the US to potentially build a multi-nation coalition in its competition with China.
A disputed election?
Another big risk that markets will be watching is whether the election ends up being disputed. This is potentially troubling as a disputed election could undermine confidence in the durability of the US political system and by extension harm its longer term reputation.
That’s the most extreme scenario – however, markets will be watching closely and likely to become quite volatile if there is any sense of the elections outcome or legitimacy being disputed. As Zehrid Osmani, manager of Martin Currie Global Portfolio Trust (LSE:MNP), notes: “The likelihood of there being a long, drawn-out process to determine the eventual winner is also a distinct possibility. Disputes over election procedures and vote counting could once again be decided by the Supreme Court, meaning the next US president may not be known until late in 2020.”
Similarly, Boscher notes: “A big risk is that the result could be so close that it takes weeks or even months to determine the outcome, with allegations of electoral fraud and the uncertainty unsettling markets.”
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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