As the 2020 U.S. Presidential election campaign entered the final furlong, our Chief Investment Officer and Head of Investment Solutions, Christian Nolting, met online with our CIO for the Americas, Deepak Puri, to discuss what could happen in the final months of this tumultuous year – and beyond.
Their conversation took place on September 30, the day after the first presidential debates, and this provided a fascinating context.
How equity markets have reacted to past U.S. elections
Historically, Puri pointed out, U.S. equity markets have tended to generate positive returns in the year following each Presidential election – no matter who won. For a month following the election, the markets tend to be “in a wait-and-watch mode” during which nothing material happens, he explained. “But as you get further down from the election date, you start seeing the animal spirits of the market come into play.”
After a year, equity markets tend to show stronger performance if the incumbent has won – or, at least, they have done in the past. “I think in this particular year, you want to keep in mind that this might be a contested election, so there might be a… heightened level of volatility one month later or even until January 20,”, he suggested, referring to the date on which Joe Biden’s inauguration would take place if he won.
Interestingly, a divided Congress has historically been very good for equities. “On average, that has generated a 13-plus percentage return [after one year]…, Puri revealed1. “So the markets tend to prefer a legislative process of a divided Congress rather than more executive action which tends to happen when you have absolute power in the Congress.”
Trump versus Biden: key policy similarities and differences
The candidates are quite similar in their approach to stimulating the post-COVID recovery in the U.S. “Vice President Biden has what’s called ‘Build Back Better’; it’s a $3.6 trillion plan that includes massive infrastructure spending, some green spending related to climate change, and then also inputs into healthcare and education,” Puri explained. “President Trump has… a 50-point mandate called ‘Fighting for You’ and that has a lot of similar ways of investing into the post-COVID recovery.”
They have also both pledged to be tough on China, suggesting tensions in that relationship will continue.
The differences in their policy pledges tend to be based on the traditional priorities of their respective parties. “So here you have the Democrats who think a little bit more of a government intervention,” Puri said, “and hence you have some tax increases both on the corporate and personal side. And on the Trump side, you might even see tax cuts 2.0 – especially on the payroll tax.”
But on international trade there is significant divergence: “Vice President Biden believes in multilateralism. He’s most likely going to rejoin the Trans-Pacific Partnership. President Trump likes to deal on a unilateral or one-on-one basis, so he is more interested in having that status quo that he has maintained since he came to power in 2017.”
The macro view: if the U.S. sneezes in 2020, will the world still catch a cold?
Nolting said that he didn’t expect the global economy to return to 2019 levels until well into 2022. He added that even this scenario would depend on there being no further nationwide lockdowns. Longer-term, he expected “a low-interest-rate environment, not necessarily negative for equities, but there will be some volatility.” He also noted the narrowing spread between U.S. and European bonds and the significant gap between the real-world economy and financial markets.
Recent history, Nolting said, has shown globalisation to be a major driver of low inflation. However, with trends now moving in the opposite direction, particularly due to the increased tensions between the U.S. and China, we could see continued inflationary pressures over the long-term. Furthermore, to make up for fiscal policies during the coronavirus crisis, we may see higher taxes that also have an inflationary effect.
Coronavirus and the U.S. elections are not the only factors we should consider when anticipating what the markets will do next, he argued. Environmental Social and Governance (ESG) investment is already playing a significant role, and investors should expect “a lot of change in the whole industry in financial markets because of further regulation coming in on the ESG side.” However, he added, November 3, 2020 could be a turning point for ESG from a political perspective.
To read our latest CIO Insights quarterly publication (October, 2020), please click here.