Weekly Update - November’s US elections are just around the corner

The US presidential election is only 5 months away and will soon become a hot topic for investors. Although the candidates will only be confirmed at the Republican and Democratic party conventions in late August, most market participants expect a race between Donald Trump and Joe Biden. Trump’s electoral rally in Tulsa on Saturday comes against a background of heightened tensions linked to the recent protests and looting which appear to have strengthened African-American support for the Democrats. According to the polling averages calculated by FiveThirtyEight, Biden currently leads Trump by 50.5% to 41.3%, the widest margin so far this year. Betting markets also favour the Democrat. Predictit has seen a surge in support for Biden since mid-May (from a probability of 45% to 59%) while Trump’s backing has slid from 49% to 42%. And the University of Iowa’s “winner-takesall” electronic market has Biden on 82.0% and Trump on 31.3%. With PredictIt putting the odds of both the Senate and the House of Representatives returning a Democrat majority at 60%, markets may start to look at Biden’s agenda in more detail. Trump’s tax cuts might be rolled back, at least in part, and the capital gains tax increased along with wealth taxes; anti-trust legislation against Tech giants could be on the cards; offshore drilling would be ended; legislation could be passed to force pharmaceutical companies to lower drug prices; and a $15 minimum wage would eat into corporate profit margins. In sum, a less market-friendly platform than a second Trump administration. Of course, the November 3 election remains some way off, and much will depend what happens in the interim. US elections often favour the incumbent, who tends to dominate media coverage thanks to his office. Moreover, the electoral college system – the actual election of the new president is decided by 538 electors, selected in each state – means that the candidate with the largest share of the popular vote does not necessarily become president. In 2016, Hillary Clinton won 48.2% of the vote with Donald Trump on 46.1% but only gained 227 electors versus Trump’s total of 304. US economic data has been mixed in recent days. Some regional business surveys have surprised on the upside – the New York and Philadelphia Federal Reserve June polls both showed a sharp rebound in expectations to the highest so far this year – but industrial production recovered less than forecast in May, leaving output down -15.3% year-on-year. And continuing jobless claims at over 20.5 million workers in early June have taken some of the shine off May’s surprising fall in unemployment. Moreover, the US has yet to see a sustained decline in new confirmed coronavirus cases, which remain stuck at over 20,000 per day on average. The number of active cases (confirmed cases minus deaths and recoveries) hit a new high this week as the pandemic continues to spread in large states such as California, Texas, Florida and Arizona. If no improvement is forthcoming, the recent bounce in retail sales might prove a flash in the pan.

Bottom line. The presidential election has not been a focus for markets so far this year with investor sentiment buoyed by the abundant liquidity provided by the Fed and the administration and some real-time signs of a pick-up in activity. However, this will change as November approaches and certain sectors such as Energy and Technology might come under pressure if Biden’s chances continue to rise.

Read full article​​​​​​​