US election tensions

President Donald Trump’s 2016 victory surprised most pollsters and sent a shockwave through the political establishment in the US. This time, the polls put the Democratic challenger, former Vice President Joe Biden, in the lead though the gap between the two leading candidates is small. Investors will be watching closely to see if Trump can secure a second term or if there is a change in control of the White House and 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. Since 1900, only five incumbent leaders seeking re-election have lost. Three of those five who were not re-elected campaigned against the backdrop of an election-year recession (Hoover in 1932, Carter in 1980 and Bush in 1992).

A few key themes have emerged during the 2020 campaign. Based on recent polling data, former Vice President Biden appears well positioned, with many electoral paths to the White House. However, investors should remain alert given possible polling shifts in key swing states and the effect of the COVID-19 outbreak on public sentiment and the president’s approval rating.

The virus could also affect voter turnout and/or drive a higher percentage of voting to mail-in ballots, possibly delaying the final tally until after election night. In terms of Congress, the polls suggest that the Democrats will retain the House, while the Senate is a toss-up.

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 when compared with their representation in the popular vote.

The president’s particular success at the last election was in flipping reliably Democratic-leaning states, including Pennsylvania, Michigan and Wisconsin, to the Republican column for the first time in 25 years. Trump’s “America First” message in 2016 resonated with the electorate in these “Rust Belt” states. President Trump won those battleground states by a narrow margin (less than 1% of the vote in each case) indicating that small shifts in part of the electorate could change the outcome this year.

Reliable Republican voting grounds

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, including Arizona, Georgia, North Carolina and Iowa, all of which also have key Senate races.

As in recent elections, Florida and Ohio are also likely to be key. President Trump won both states in 2016 and the path to the White House may run through both of them this year.

Economic policies

If Biden wins the election, given his announced policies and comments, we would expect him to outline a series of emergency stabilisation policies related to COVID-19. Biden’s policies in general are also likely to be punctuated by a more federally driven approach and one that adopts a more active regulatory posture, in line with previous Democratic administrations. He could also embrace a multilateral approach to trade policy that focuses on strengthening and expanding the post-World War Two global order.

The heart of Biden’s policy agenda – tax reform and fiscal expansion, mainly related to healthcare, infrastructure and climate/energy – could depend largely on the outcome of the Senate. If the Democrats win control, they may consider eliminating or limiting the legislative filibuster. If some form of the filibuster remains, a Biden administration would likely rely on the budget reconciliation process, which has limitations, to pass portions of his policy agenda. If the GOP retains the Senate, a divided Congress might stall much of a Biden administration’s legislative priorities.

If Trump is re-elected and has to contend with a divided Congress or if the Democrats control both chambers, we would expect the administration to continue to focus on deregulation and trade policy reforms in line with its “America First” stance. His potential legislative agenda

• a Tax Cut 2.0 and a possible infrastructure programme
• could be negotiated, but will be challenging, given the obstacles in Congress and the fluid economic conditions.

As more details emerge on each candidate’s platform, the financial markets may start differentiating between potential sectors and companies that would benefit from stated policy agendas. This is likely to result in greater volatility and dispersion at the stock level.

Contested election

With a higher than normal number of absentee and mail-in ballots expected, there is a heightened possibility of ballot disputes, delayed results and legal challenges. Both parties have already filed dozens of lawsuits alleging voter suppression, fraud or rigged elections. Coupled with a deeply polarised electorate and the prospects of weeks of uncertainty, risks that could undermine the 2020 election process and its results are mounting.

Key dates in the election process may serve as deadlines for disputes. The electoral college delegations are scheduled to meet on 14 December 2020 and deliver the official results by 23 December so that Congress can ratify the vote on 6 January 2021. The terms of the president and vice president then expire on 20 January 2021. Absent an extraordinary situation, we assume that these dates will remain key markers in the election season.

Too close to call

While former Vice President Biden maintains some polling advantages, the election is far from certain. Given the unpredictable medical and economic backdrop, the effects of possible legal challenges, polling error rates in key swing states and the popular vote/electoral college split, this may be one of the most volatile US election seasons in recent history.

Investments can fall as well as rise in value. Your capital or the income generated from your investment may be at risk.

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