History suggests that in the absence of a recession, presidential elections in the United States strongly favour the incumbent, with only five incumbent presidents losing re-election (3 of those were during a recession). The 2020 election year is also set to be a recession year, and based on recent poling data, the former Vice President Joe Biden appears well positioned to become the 46th President of the United States. Public sentiment has changed materially over the last few months with approval ratings for President Trump dropping significantly, while national and state polling has also turned against the president, taking Biden’s lead to roughly 9 percentage points (from 4 at the beginning of May). Given these data, odds makers currently give Biden an approximately 58% chance of winning the election.
However, at this stage market participants should be cautious about drawing a firm conclusion on the election. Firstly, the margin of error historically in election polling, especially at the state level, is worth considering when trying to draw a conclusion about the 2020 electoral college. While Biden’s lead is greater than Hillary Clinton’s in many key swing states at approximately the same point in the election cycle, his lead could dissipate if polls move in Trump’s favour given a possible polling error.
Additionally, regardless of the polls, a resurgence of COVID-19 could affect voter turnout and shift a large portion of voting to mail-in ballots, which could delay the final vote tally until well after election night. Given that each state has its own laws and regulations governing when, where, and how voters can cast ballots, rules vary across the country. Concerns about depressed turnout are already elevated, and COVID-19 outbreaks could significantly affect voter turnout, particularly in states that do not have easily accessible vote-by-mail policies.
While it is difficult to determine the probable outcomes at this stage, we can attempt to outline the potential scenarios that may arise and the implications for major policy areas that are most consequential for markets and the economy, such as tax, fiscal, and trade policies.
Democratic Sweep
In a scenario of a Democratic sweep (Biden wins, Democrats win the Senate and retain the House), we believe that the Biden administration will focus on recovery policies centred on tax and fiscal policy expansion targeting health care, infrastructure and climate change. Biden has proposed a host of programmes related to infrastructure and climate ($2 trillion), healthcare ($750 billion), and higher education ($750 billion) that would increase federal government spending by approximately $3.5trn over ten years.
To finance these, he has proposed tax policy changes, focused on the top 1% of households and corporates, that may raise $3.1-4.0 trillion over ten years. For corporates, his plan aims to increase the top corporate income tax rate from 21% to 28% and double the existing minimum tax on profits earned by foreign subsidiaries of US firms from 10.5% to 21%. Additionally, a Biden administration would, in our view, revert to a more active regulatory posture as a way to enact its policy agenda. The presidential candidate has frequently voiced concerns about the current administration’s approach to de-regulation. If these economically significant rules are implemented, investors would need to consider the sensitivity of each sector to a new regulatory regime that may result in higher taxation provisions and potential increases in financial penalties.
Public sentiment has changed materially over the last few months with approval ratings for President Trump dropping significantly, while national and state polling has also turned against the president, taking Biden’s lead to roughly 9 percentage points (from 4 at the beginning of May). Given these data, odds makers currently give Biden an approximately 58% chance of winning the election.
Finally, in terms of trade policy, Biden has voiced concerns about China’s industrial policies and investments in technology, infrastructure, and energy. However, Biden has described the president’s tariff-focused agenda as “erratic” and “self-defeating.” We therefore believe that a Biden administration would try to make a multilateral economic alliance the cornerstone of US trade policy toward China. This could take the form of revised trade agreements that incorporate minimum requirements in terms of trade, investment and other economic factors, as well as incorporate preferential trading elements, loosen restrictions on technology transfers to trusted allies, and develop new rules to encourage technology cooperation.
Biden Wins, Republicans Retains the Senate, and Democrats Retain the House
In a scenario in which Biden wins the presidential election, Republicans retains the Senate, and Democrats retain the House, a Biden administration would still be able to enact a large portion of his regulatory and trade agenda. In terms of the core of Biden’s legislative agenda (tax reform and fiscal expansion policies) he would be forced to persuade GOP senators to support these proposal, which may prove challenging. In addition, some moderate Democrats may be uneasy about portions of his policy agenda as well. Given that opposition, Biden may be forced to scale back his legislative agenda and rely on executive orders to implement policies.
Trump is Re-Elected, Democrats Win Control of the Senate and Retain the House
In a scenario in which President Trump is re-elected and the Democrats control Congress, we would expect legislative gridlock. There is a possibility that the Trump administration and Democratic Congress could strike policy compromises for a middle-class tax cut and new-money infrastructure spending package, but it is tougher to foresee, given the current political and policy differences between the two sides. With limited legislative options, we believe that the president would continue his trade policy reforms and de-regulatory agenda with the hopes of helping the GOP win back the House in the 2022 mid-term elections.
Trump Is Re-elected, Republicans Retains the Senate, and the Democrats Retain the House
In a scenario in which President Trump is re-elected, the GOP retains the Senate, and the Democrats retain the House (the current status quo), we would expect a continuation of the president’s policy agenda, with a focus on de-regulation and an “America First” trade policy. In terms of the market-consequential areas, the administration may propose further tax cuts for households and corporations, maintain a gradual expansion of fiscal policy with an emphasis on an infrastructure plan, and further embrace a unilateral approach to trade policy with regard to China, Europe, and others. Consequently, under this scenario we would expect a continued deterioration in US-China relations given the seemingly irreconcilable differences between US security concerns and China’s industrial policy.
Overall, the impact that any president can have on the economy and market depends on their ability to enact legislation. To be able to put in place more controversial policies, control of both the House of Representatives and the Senate is necessary. It is difficult to see President Trump regaining control of the House of Representatives, were he to win. Similarly, it is difficult to see the Senate shift to a Democrat majority. Therefore, a divided Congress appears the most likely outcome. While political gridlock is not a desirable scenario, it may comfort investors to know that it could act as a considerable restraint on the more radical proposals on both sides. Regardless of the election outcome, it seems unlikely that the trade conflict with China will be fully resolved, which may prove to have a greater impact on global investment markets than the composition of Congress or the governing administration.