US elections are always significant and a point of interest around the world, but many are seeing this November’s as particularly so.
Here are the big questions on the minds of investors.
Can we trust the polls?
Polls, as we all know, are not always correct.
This time around they are of particular interest because four years ago only a handful of polls predicted a Trump victory – Clinton was the clear favourite. This was because Clinton’s support was overestimated due to a methodological issue by most pollsters, and a historically large number of late deciding voters ultimately plumped for President Trump.
While the pollsters have been adjusting their models to improve them this election, it’s too early to say how many undecided voters there will be come election day.
What would a Democratic victory mean for markets?
Traditionally, a Democrat sweep would be seen less positively than a Republican victory. However, in the current circumstances a unified Democratic government wouldn’t be all bad news for stocks.
We would expect more spending to fight the Covid-19 crisis, as well as substantial environmental and infrastructure-related investment which would support the economy. Education, health and housing would likely also see investment.
Meanwhile, other Democratic policies opposed by businesses such as a higher minimum wage (which would hurt profit margins), have a silver lining – stronger consumption and therefore corporate revenue growth. Plus, we would expect a Biden presidency to be less confrontational on the world stage, easing the nerves of many.
For equity markets, a Democratic government would seem to be a slight negative. US profits enjoyed a boost in 2018 on the back of Trump’s tax cuts for businesses; corporate taxes will very likely rise if Biden wins the presidency and the Democrats win back the House.
Taxes for higher earners would likely also increase. It is predominantly this cohort of society that invests in stocks, so higher taxes would mean less savings that could be put into equity markets.
Another risk is regulation. A survey conducted by the National Federation of Independent Business shows that small business concern about regulation rose sharply under Obama and then dropped again under Trump. Biden is considered to have very similar policy positions to Obama, so we would expect concerns to reappear. New regulations would likely hurt businesses’ willingness to invest, having implications for corporate profits.
The Democrats would also expand Medicare, inflicting negative implications on pharmaceutical companies’ pricing power. Boosting Medicare would also reduce the pricing power of private health insurance, as the public health option would benefit from government subsidies, increasing its competitiveness.
Energy stocks would see implications too, with greater regulation on fossil fuel producers as Biden seeks to eliminate carbon emissions by 2035.
The coming months will see plenty of fluctuations as the market seeks to predict the election outcome. The bottom line is that while a unified Democratic government would be a headwind for the stock market because of higher taxes and regulation, it is not the kind of event which halts a stock market expansion in its tracks.
Main image credit: Getty