If you are sitting in Australia watching the US election campaign unfold with a mixture of astonishment and trepidation, then spare a thought for investors who have billions of dollars riding on it.
Entering the final stretch of the 2020 race, with the first rancorous debate behind us and President Trump back in the White House following his coronavirus diagnosis, now is a good time to pause and consider what might be at stake for investment portfolios.
So, I straw-polled a handful of top local investors this week to try and gauge how they are viewing proceedings. Their responses could be best surmised as a confused emoji face. The truth is, while polls and betting markets are now pointing to a clear win for Joe Biden, nobody really knows what the result will be, nor how the markets will react to it. “I really don’t know,” said one market participant when asked about the situation.
It almost goes without saying but what happens in the US markets matters in Australia. The ASX almost unfailingly takes its lead from Wall Street each trading session, super funds have increased their weightings to global shares in recent years, and many local retail investors now have money directly invested in US stocks.
The sharp polling shift in favour of Biden this week coincided with a rethink on Wall Street about what a victory for the Democrat could mean for investment portfolios. Market strategists from top houses including JPMorgan and Citigroup are growing more comfortable with the prospect of a Biden victory.
Trump has been good for the US stockmarket – perhaps not as good as the president implies with his tweets – but much better than many investors thought he would be this time four years ago.
The benchmark S&P 500 index is up nearly 50 per cent and has hit record highs on his watch. That compares to a return of about 70 per cent under Barack Obama and a 16 per cent slide under George W Bush at comparable points in their presidential cycles.
Until now, the dominant narrative among investors has been that Biden would be bad for the markets, or at least not as good as Trump has been. For one thing, the former vice-president plans to reverse some of Trump’s business tax cuts, which would be negative for corporate earnings.
There is also a strong belief that, in a nod to the ascendant left wing of his party, Biden would impose significant regulation on America’s technology giants, which are now the biggest companies on its sharemarket and responsible for much of the broader market’s impressive returns. (For what it’s worth, not everyone is persuaded by that logic. RBC Capital Markets analyst Mark Mahaney says differences between Trump and Biden on tech “will likely be more nuanced than dramatic,” pointing to Biden’s looser stance on immigration and plans for $300 billion in spending on 5G, electric vehicles and artificial intelligence as positives for the sector).
At the very least, it is a safe bet to assume that should he win the keys to the White House, Biden will not view the S&P 500 as a barometer for the success of his presidency as Trump has done.
The ‘Biden-is-bad for Wall Street’ narrative started to fade this week though, as the odds of a clear victory for the former VP appeared to rise.
Yet one of the key lessons of the past four years is that, in the bitterly divided reality TV show that is American politics, almost anything is possible. And the renewed market optimism about a Biden victory that surfaced this week hinges on a few critical assumptions.
The first is, of course, that Biden will actually win. The polls famously pointed to a Clinton victory four years ago, and we all know what happened then. Sure, Biden’s lead in the national polls and in key swing states appears to be more commanding than Clinton’s were in 2016. But polling has proved unreliable at multiple elections around the world (including Australia) and there is still nearly a month to go before election day.
The next assumption is that that a ‘blue wave’ of support for Democrats will ensure the party achieves control of the Senate, and is therefore actually able to govern and pass legislation. Polling and betting markets are pointing to this too, but again the experience of 2016 should give everyone pause for thought.
The final assumption is that Biden’s victory will be so strong that the result will not be contested by Trump. Based on the president’s recent utterances and behaviour, and the fact the postal voting is expected to be higher among Democratic voters than Republicans, that is an assumption that could prove naive.
One thing is for sure. Investors detest uncertainty, and if the leadership of the world’s largest economy (and most powerful military apparatus) is undecided for weeks, the markets really won’t like it.
Source: Thanks smh.com