Throughout this year, investors have been fixated by the impact of the COVID-19 pandemic on the economy and the policy response to it. By comparison, markets have not reacted to polls that show Democratic presidential nominee Joe Biden with a large lead nationally over President Trump and the possibility of a “blue wave” sweep of Congress.
As global financial markets await the outcome of the US presidential polls, the run up to the outcome will be marked with volatility. Most analysts say that a fiscal stimulus ahead of the poll outcome is unlikely, which will keep the markets on edge.
The uncertainty over who will lead the most powerful country in the world for the next four years is keeping investors on the toes. Though, it may not be of much concern for India politically, from an economic point of view, the emerging equation may put some sectors with an advantage over others depending on who wins the election.
President Donald Trump has consistently pointed to tax cuts and regulatory relief as key successes of his first four years in office. He has repeatedly pushed for the end of the Obama-era health law but has yet to deliver a plan to replace it. And he has spent most of this year defending his response to the coronavirus pandemic while fighting openly with scientists and medical experts about vaccines, treatments and more.
At first blush, this is surprising considering that the outcome could be a game-changer from the economic policies pursued by Trump and congressional Republicans. However, one possibility is that investors are not convinced that the polls are accurate.
If Trump pulls off another upset victory, many observers believe the stock market will rally because it would ensure policy continuity, especially as regards the likelihood of future tax cuts. However, Trump’s re-election probably would not have as large of a market impact as his election did four years ago, when he was given little chance of winning.
If he gets another four years in office, there’s no indication of any big policy shift.
A glimpse at how a second Trump term might look:
Economy, Taxes, And Debt
Low unemployment and a soaring stock market were Trump’s calling cards before the pandemic. While the stock market clawed its way back after cratering in the early weeks of the crisis, unemployment stands at 7.9%, and the nearly 10 million jobs that remain lost since the pandemic began exceed the number that the nation shed during the entire 2008-09 Great Recession.
And by last Friday, Wall Street had closed out another punishing week with the S&P 500 posting its first back-to-back monthly loss since the pandemic first gripped the economy in March. Much of the market’s focus has been on what’s to come for the economy when coronavirus counts are rising at troubling rates across Europe and the United States.
Trump has predicted that the U.S. economy will rebound in late 2020 and take off like a “rocket ship” in 2021. He promises that coronavirus vaccine or effective therapeutics will soon be available, allowing life to get back to normal. His push for a payroll tax cut over the summer was thwarted by stiff bipartisan opposition. But winning a second term — and a mandate from voters — could help him resurrect the idea.
An analysis from the Committee for a Responsible Federal Budget estimates that Trump’s plan would increase the debt by about $5 trillion over 10 years. That’s on top of the $13 trillion in deficits the country is already expected to run up during that time.
The national debt now stands at more than $20 trillion.
Coronavirus Pandemic
Trump insists that the country is “rounding the corner” on the pandemic and has stepped up calls on Democratic governors to lift coronavirus restrictions in their states. But Trump’s sunny outlook belies the ground truth in many states — including several critical to his path to 270 Electoral College votes — that have seen a surge in the virus.
The president has often disputed medical experts in his own administration, among them infectious disease expert Dr. Anthony Fauci, on key issues surrounding the virus, including the timing of a vaccine, the need for social distancing and the importance of masks to contain the virus. His campaign rallies were filled with people gathered less than 6 feet apart without masks. His announcement of the nomination of Amy Coney Barrett to the Supreme Court was widely regarded to be a super spreader event after he and several other people in attendance were diagnosed with the virus.
Trump spent three days at Walter Reed National Medical Center after his diagnosis. One of the drugs he received, remdesivir, has since been approved by the Food and Drug Administration for treatment of COVID-19.
Trump also says he’s “pretty damn certain” that vaccines and new treatments for the virus are coming in the not-so-distant future. Scientists are more cautious about the timing.
Congress passed and Trump signed into law a more than $2 trillion coronavirus relief package earlier this year, but the two sides have been unable to agree on an additional aid package.
Foreign Policy and National Security
Trump’s foreign policy centres on his mantra of “America First,” but in the months leading up to the election, he engaged in plenty of international diplomacy.
The Trump administration scored a big win in recent weeks by nudging three Arab states — Bahrain, Sudan and the United Arab Emirates — to normalize relations with Israel, and Trump says more countries will follow. Historically, Arab nations have refused to recognize Israel until the Palestinians’ goal of an independent state was realized. Trump is aiming to create an alliance of countries against Iran.
Trump officials also brokered an economic cooperation agreement between Serbia and Kosovo, bitter foes in the Balkan wars. The administration, however, is still trying to reach an agreement with Russia to extend the last remaining arms control agreement between the two nations, which expires in early February.
He counts as another major achievement his efforts to cajole more NATO members to fulfil their pledge to spend 2% of their gross domestic product on defence.
Trump also pulled the U.S. out of the Iran nuclear deal, saying it was one-sided in favour of Iran. He’s announced that the U.S. is withdrawing from the intermediate-range nuclear missile treaty with Russia and the Open Skies Treaty, which permits 30-plus nations to conduct observation flights over each other’s territory. He later said he might reconsider pulling out of that treaty.
The US president has reduced to about 3,000 the number of troops in Iraq. The U.S. plans to reduce the number of troops in Afghanistan to at least 4,500 in November, although Trump wants them all withdrawn by the end of the year. He also counts his engagement with North Korea’s Kim Jong Un as a foreign policy victory, yet he’s been unable to prod Kim to give up his nuclear program.
Stock Market Impacts
The race to the White House is a keenly tracked global event. While it may be challenging to anticipate the outcome this time around, the impact on Indian markets is likely to be positive, according to UBS. They believe that if Biden comes to power by winning both houses of Congress, India will benefit from potentially more favourable US trade policies.
The counting of votes till now suggests Democrat Joseph Biden will most likely emerge victorious, but incumbent Donald Trump could still turn the table.
But the Senate, another powerful wing of the US government, is likely to tilt towards Republicans. Analysts believe if both wings of the government go to different parties, it could lead to a policy paralysis and create the biggest risk to markets.
In the case of a mixed equation, where Biden becomes next US President, and the Senate is controlled by Republicans, markets will construe it as an impasse for various reforms and nothing dramatic will be seen in the next four years.
The other scenario, if Trump wins but the Senate goes to the Democrats (though political pundits believe it is less likely to happen at this point of time), can be equally unfavourable for the market.
In case Trump wins but the Senate flips to Democrats, then a divided government would create hurdles in getting major legislations through. Again, not a good scenario from the market's perspective.
Policy wise, there are some major distinctions between the two candidates. Biden is expected to raise taxes; big technology companies could face more scrutiny; renewable energy will be in focus and spending on health and education will increase.
If Biden wins, expect Big Tech to face greater regulation and /tax oversight, meaning a possible hiccup for Indian IT, while pharma firms will benefit from greater government spending — a boon, but could come with higher pricing concessions for Indian companies.
Trade is likely to wallow in more predictable policies — but a sharp easing of trade tensions could weigh on Indian beneficiaries for example chemicals and manufacturing while agriculture and commodities will face uncertainties.
Some people tracking the market believe a Biden Presidency will lead to a transient selloff in US equities and lead to a fall in the US dollar, and gold could rally, helped by a tumbling greenback and concerns over higher fiscal spending and potentially rising inflation.
Needless to mention, the Fed will remain tolerant of the same, with the central bank recently articulating that it would stand pat on interest rates for next three years. In case of Biden becomes the next US President, base metal prices should move higher as the US-China relationship will stabilise and markets will start pricing in a probable trade deal.
For India, who wins might not make any material difference in the long run, but in the near term, a Trump win is likely to benefit IT along with chemicals and tiles, whereas a Biden presidency would be better for pharma.
The counting of votes till now suggests Democrat Joseph Biden will most likely emerge victorious, but incumbent Donald Trump could still turn the table.
But the Senate, another powerful wing of the US government, is likely to tilt towards Republicans. Analysts believe if both wings of the government go to different parties, it could lead to a policy paralysis and create the biggest risk to markets.
In the case of a mixed equation, where Biden becomes next US President, and the Senate is controlled by Republicans, markets will construe it as an impasse for various reforms and nothing dramatic will be seen in the next four years.
In case Trump wins but the Senate flips to Democrats, then a divided government would create hurdles in getting major legislations through. Again, not a good scenario from the market's perspective.
Donald Trump’s voter base are blue-collar workers, especially those working in old economy sectors. He is likely to focus on his existing policies, while also pressuring for a stimulus as soon as possible, albeit different in character than expected from Biden.
If Trump retains the presidency with a Republican Senate, he would be in a position to force Senate Republicans to agree to a large fiscal stimulus, if he feels doing so would help propel economic recovery and aid financial markets.
Trump has been advocating a stimulus package to appease his voters. However, whether he continues to do the same after the election is something that remains to be seen. On the other hand, low taxes could be the mainstay, leading to greater corporate profits.
If Trump reclaims presidency, we could have an ensuing stock market rally and stronger US dollar, as investors will be pleased with the fact that US corporate taxes will remain low. On the commodity front, Trump's victory will translate into a weaker tone in precious and base metals, with non-ferrous complexes being the most vulnerable, hauled lower by the prospect of heightened trade tensions with China.
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