US election tensions

09 July 2020

6 minute read

The US election campaign is heating up. The pandemic, recession and protests are likely to help shape the race for the White House. More financial market volatility seems a given as the US election nears.

Focus – US election

President Donald Trump’s 2016 victory surprised many pollsters and sent a shockwave through the political establishment in the US. Investors will be watching closely to see if he can secure a second term or, alternatively, if there is a change in control of the White House, as well as either house of Congress.

The 2020 US election is scheduled for Tuesday, 3 November 2020 and its result will affect economic, tax and regulatory policy agendas in the US. With four months still to go, it is too early to predict whether the president will be re-elected. Since 1900, only five incumbent US leaders seeking re-election have lost. Three of those five who were not re-elected campaigned against the backdrop of an election-year recession (that is, Hoover in 1932, Carter in 1980 and Bush in 1992).

COVID-19 changes the nature of the campaign

Quarantining and social distancing make traditional campaigning (such as, visiting states and holding rallies of large groups of people) difficult. Donald Trump, in particular, has made political rallies a cornerstone of his campaigns in the past. Today, however, both President Trump and the presumptive Democratic nominee, former Vice President Joe Biden, have had to curtail their direct engagement with voters and traditional approaches to campaigns.

The Democratic and Republican national conventions in August will also be different compared to past years. In contrast to Republicans, Democrats have scaled down their convention plans and made much of it virtual. The televised debates between candidates will go ahead as planned, however, and the Trump campaign has pushed for a fourth debate.

Only a few months ago, multi-decade-low unemployment, growing wages and a record-high stock market were core elements of President Trump’s re-election campaign. Since then, the locking down of the US economy has induced recession, and the unemployment rate has increased to the highest levels since the Great Depression. Given the unexpected turn of events, both campaigns are reframing the debate and pointing voters to other issues, most notably which candidate and party is better positioned to ensure a strong US recovery and to deal with topical foreign policy matters such as relations with China.

Key battlegrounds

In the US presidential electoral system, instead of the national popular vote determining the winner, the outcome is determined by who receives a majority (270) of the votes of the electors in the Electoral College. The allocation of electors – one for every member of a state’s congressional delegation – increases the political influence of less populated and certain battleground or “swing” states.

In 2016, President Trump’s successfully flipped several historically Democratic states to the Republican column for the first time in 25 years, including Pennsylvania, Michigan and Wisconsin. President Trump won those battleground states by a narrow margin (less than 1% of the vote in each case), which underscores how small shifts in parts of the electorate can change the outcome of an election.

For the 2020 election, polling shows that former Vice President Joe Biden currently leads, but with more than four months until the election, there is considerable time for developments in the race and, certainly, developments in the COVID-19 pandemic and the US economic recovery must also be watched closely.

There are a number of states that have traditionally been reliably Republican that may be in play in 2020, driven in part by demographic shifts. These include Arizona, Georgia, North Carolina and Iowa – all of which have key Senate elections occurring on the same day as the US presidential election. As in recent elections, Florida and Ohio are also likely to be key battleground states. President Trump won Florida and Ohio in 2016, and the path to the White House will likely include significant campaigning in both states this year.

Trump’s policy agenda

A second Trump term would likely consist of an extension of the current policy agenda. His economic policy has been defined by its trade strategy, lower taxes (both individual and corporate) and deregulation. On trade, his administration has withdrawn from and renegotiated numerous trade agreements, including the US-China trade deal.

Trump’s “America First” message in 2016 resonated with the electorate. His foreign policy in his first term has pivoted away from globalism, and he has sought to rework many previous international agreements. For example, he has withdrawn the US from the Paris Climate Agreement and the Iran nuclear agreement. If re-elected, his second term is expected to see a continuation of this America First policy, along with greater focus on trade deals with the UK and EU, both of which are stated goals.

Biden’s policy agenda

The presumptive Democratic nominee, Joe Biden, traditionally has been viewed as a moderate in a Democratic party that is shifting left. He has begun to outline his broad policy stance, with initial focus on the middle class, expanding healthcare and strengthening workers’ rights.

Biden has also proposed raising the top federal income tax rate back to 39.6% and the corporate tax rate to 28%, and he supports increasing the federal minimum wage to $15 an hour.

If elected, Joe Biden is likely to place a greater emphasis on global policy areas, such as climate change (re-joining the Paris Climate Accord and targeting net-zero emissions by 2050) and multilateralism. The deregulatory efforts of the current administration, across sectors, also would likely come to a halt, and could be reversed if there is a sea change in personnel across the administration.

Joe Biden is likely to place a greater emphasis on global policy areas such as climate change and multilateralism

Four months to go – and many unknowns ahead

The uncertainties in the US resulting from COVID-19, the economy and protests add an extra dimension to the 2020 presidential campaigns for both Trump and Biden.

As has been seen in prior elections, a great deal can change over the course of a campaign cycle, and indeed in a matter of months. Come November, the US economy may look very different, the COVID-19 situation will look different and news flow will likely add even more variables. One thing seems certain however: the 2020 election cycle is sure to cause more volatility in financial markets over the coming months.

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