US election: What will it mean to equity markets?
Two candidates offer voters, and the markets, very different policies
Historically, the party affiliation of the White House occupant has been an inconsistent predictor of future equity market returns.
The Republican Party is typically characterised by policies deemed more market supportive, however, since the beginning of the post-war period average annualised returns have been below average for Republican Presidents.
There are other, more significant, factors that contribute to market returns over the course of a president's tenure, as Covid-19 has demonstrated thus far this year. The implications of the policy differences between the two candidates in this election this year are considerable and could result in bifurcations between and within certain sectors of the economy depending on its outcome.
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The implementation of policy initiatives is also dependent on which party controls the House and the Senate. In 2018, the Democrats won a 36-seat majority in the House of Representatives, while the Senate is currently controlled by the Republicans.
The outcome of the two chambers is important since a split congress will give the opposition party greater clout in thwarting proposals, whereas a ‘Blue Wave' or ‘Red Wave' scenario (whereby a single party controls both the White House as well as congress), will allow the inhabiting administration to embark upon its respective vision for the United States with less resistance.
Moreover, if we do see a change in the Senate in the event of a Blue Wave, the Democrats may still face headwinds in pushing legislation over the line. Several Senators are not from solid blue seats, and so may be more reluctant to support some of the more progressive policies.
The market impact of the election outcome is best broken down into specific sectors since investors are likely to price in a stronger outlook for those areas that stand to benefit from certain policies.
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For instance, both Donald Trump and Joe Biden are in favour of infrastructure spending, however, the former Vice President is likely to promote his green energy agenda. With sufficient congressional support, this could impact renewable energy companies across the globe, while fossil fuel energy companies and infrastructure could face both regulatory and demand headwinds.
Bank stocks are another sector which could respond negatively with a Democrat majority, as investors anticipate a combination of tougher regulation and higher taxes. Biden plans to reverse half of the corporate tax cuts that Trump made in his first term through the Tax Cuts and Jobs Act of 2017. This would have repercussions across corporate America. A Democrat government is unlikely to pursue such a policy whilst the economy continues to suffer from the implications of Covid-19.
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