We warned recently that equity markets were entering choppy waters and last week’s developments can only add to the turbulence.
Equities had started to recover some of their losses in the recent correction but the first of the US Presidential debates and then the news of Trump testing positive for Covid swiftly took centre stage. Equities fell back on Friday only to perk up again this morning.
Biden was widely agreed to have fared better in last week’s debate – not that much debate actually managed to take place. Trump testing positive is more of a wildcard but would also seem to favour Biden. It focuses attention back onto Covid (not Trump’s strong point) and the President’s campaign is now in disarray. Against that, Trump could benefit from a sympathy vote.
Biden has had a consistent lead in the national polls in recent months and is also leading in the key battleground states. He looks considerably better placed than Clinton was four years ago and the betting odds have recently moved significantly in his favour, with his chance of victory now put at 60%.
However, as far as the markets are concerned, the Congressional elections are almost as important as the Presidential election. Currently, the Democrats have a sizeable majority in the House of Representatives but the Republicans have a small majority in the Senate. If as now looks quite possible, the Democrats took the Senate as well as the Presidency, this clean sweep would mean many more of Biden’s policy pledges would be implemented rather than thwarted.
As for the policies themselves, they’re a mixed bag. They include plans to raise the corporate tax rate and minimum wage and for increased regulation – none of which are market friendly. But Biden also plans a sizeable increase in spending on infrastructure, healthcare and education. This would be more positive particularly if it fed into higher growth.
Biden’s approach to foreign policy should also make for less of a roller-coaster ride. Even though US hostility towards China looks certain to continue, his approach is likely to be less impulsive and confrontational than Trump’s.
The impact of last week’s news is complicated by the failure of the federal Government to agree a renewal of the income support measures which expired in July. A deal had become unlikely ahead of the election but, with the fall-out from Covid all too visible once again, this could force a compromise to be reached which would be positive.
One final complication is that this all assumes there is a clear election result. The possibility which is haunting the markets is that the vote is a close-call. The result might then not be established for weeks and Trump may not go quietly with all his talk of electoral fraud due to increased postal votes.
The bottom line is that the US elections have many moving parts and will be a sure source of market volatility over the next month or two. That said, we are not expecting a repeat of anything like the turbulence we saw earlier in the year. At the end of the day, the lesson from history is that Fed policy is generally much more important for markets than Government policy – and the Fed is a centre of stability at the moment with policy firmly on hold.
Rupert Thompson
Chief Investment Officer