US equity investors will want to see a clear winner
President Trump faces major obstacles to his re-election, in part due to the sharp deterioration in the economy following this year’s coronavirus shock. Historically, a large increase in unemployment has not boded well for the incumbent’s re-election (cf. Jimmy Carter, George Bush). Opinion polls taken after the first TV debate last week (but before Trump’s hospital admission) show former vice president Joe Biden extending his lead among voters.
Even if Biden wins next month, the shape of fiscal and budgetary policy in the US will depend on whether the Democrats re-take the Senate and, if so, the size of their majority. We still think Biden’s priority, if he wins, will be on stimulating the economy (including via ‘green’ federal investment) rather than abruptly raising taxes.
No matter who wins, the policy mix is likely to remain influenced by Modern Monetary Theory, which has been rapidly taken on board by opinion makers on the left and right of the political spectrum in the US. This means economic policy should stay very growth friendly after the November elections.
The US elections will come at the peak of a 3Q reporting season that will have special importance after the steep fall in earnings due to the coronavirus outbreak registered in the previous quarter. The earnings decline is expected to have tailed off in Q3, yet fewer-than-usual companies continue to provide guidance.
Lingering uncertainty around the elections, including the fear that the results are contested, could translate into higher volatility in US equities, although the Federal Reserve’s assurance that rates will stay ‘low for long’ should support valuations and ensure US equities have further upside later this year.
A reversal of Trump’s corporate tax cuts under a new Biden administration could halve the recovery in earnings expected in 2021 and could curb share buybacks (of note, US tech companies have become the main instigators of share buybacks this year). However, we repeat our belief that a President Biden would move first to boost consumer spending through fiscal stimulus, leaving tax increases under later in his tenure.