February’s crystal ball for Democrat candidacy race?

Very few investors would disagree that the number one political event this year is the US elections. In a turbulent first term for President Donald Trump, which includes trade wars, regular criticism of US Federal Reserve Chair Jerome Powell and impeachment proceedings, the president’s go-to indicator, a strong stock market, still remains intact.

The path to election day on 3 November is likely to be eventful and uncertain, triggering renewed financial market volatility.

Path to the White House

The path begins in February with a five-month process for Democratic candidates, where caucuses and primaries in each state will lead to an eventual challenger to the president being announced at the Democrat national convention on 13 July in Wisconsin.

The first caucus, in Iowa on 3 February, and the first primary, in New Hampshire on 11 February, are crucial for leading hopefuls and underdogs alike (in the case of the Democrat party). They are an opportunity to sustain momentum, or in the case of the underdogs to create momentum of their own and take it away from the favourites before the Super Tuesday primaries on 3 March.

History suggests that Iowa and New Hampshire give an early indication as to which candidate is likely to win the nomination. In the 2004 and 2008 elections, the winner in the Iowa caucus won the nomination and received roughly a 30 percentage point increase in the likelihood of being nominated directly after the caucus.

Furthermore, the caucus is a good guide as to those candidates that will not be successful. Since 1972, no candidate who has finished fourth of worse has gone on to win the nomination. In the last six elections, no candidate has won nomination without taking either the Iowa caucus or the New Hampshire primary, illustrating the importance of generating early momentum.

Global impact

President Trump won swing states such as Florida and North Carolina in 2016 and overcame the Democrat's “blue wall” by taking Wisconsin, Pennsylvania and Michigan. However, the economic and political landscape has changed and whether Trump can win re-election with record low approval ratings is the big question of this election.

In our Outlook 2020, we highlighted how globalisation has taken a step back and has been slowed down by trade conflicts, heightened tensions in the Middle East and a general rise in populism. The next step is either towards further separation (President Trump re-elected) or a return towards a more cohesive, but still fairly fragmented, global order (a Democrat wins the presidency).

One consequence of the election race that is probable is uncertainty and volatility weighing on the economy and markets. With uncertainty regarding the future US international policy, we prefer to focus for the time being on assets exposed to the US consumer. We will review the impact and prospect for the US elections regularly throughout the year.

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