Markets hold their nerve as US vote nears, but a disruptive outlier lurks

The outcome of next week’s US election will have profound effects on markets, economies and the world order. It’s improbable that the voters’ choices, and their impact, could produce more divergent outcomes.

If the polls are correct and the election produces a “Blue Wave” that gives the Democrats control of both the House and the Senate, it will be in some respects a return to a more normal presidency and United States, albeit with perhaps the most progressive agenda of any US presidency since Franklin D. Roosevelt.

A Biden presidency could result in  the Democrats implementing the most progressive policy agenda since Franklin D Roosevelt.
A Biden presidency could result in the Democrats implementing the most progressive policy agenda since Franklin D Roosevelt.Credit:Kevin Dietsch

If Trump and the Republicans hold on and retain control of the Senate the future is less clear – there is no published Republican platform for a second term – but it seems reasonable to assume more of the same.

A continuation of the “America First” isolationist and protectionist foreign and trade policies and a continuation of the belligerent stance towards China, more deregulation of the domestic economy, more tax cuts, more aggressive reopening of the economy, and even more politicised and less professional bureaucracy and more government by tweeting are probable.


There is, of course, the potential outcome where Biden wins the presidency but the Republicans retain control of the Senate, which would probably mean a smaller fiscal response to the pandemic and a less urgent approach to implementing the very ambitious Democrat policies on the environment and climate change.

Lurking as a highly disruptive outlier is one where there is no clear-cut outcome, with the Republicans challenging the outcome in the courts and/or some state legislatures controlled by Republicans over-riding the voters to nominate their own slate of the electors who decide the presidency.

That would exacerbate the already considerable potential for widespread civil unrest in the event of a close result for either party and probably generate turmoil within markets.

Given the gulf in the policy approaches of the parties, the temperaments of the two candidates for the presidency, the risk of a contested outcome and associated civil unrest and the worsening statistics of the pandemic in the US one might expect markets to be nervous and volatile. They’re not, at least yet.

While the US stock market is about 3 per cent off its highs a month ago, it is still up about 55 per cent since its March lows and, despite the pandemic-driven recession, more than 7 per cent higher than at the start of the year.

Interestingly, bond yields – which, after some turbulence in March during the initial recognition of the severity of the virus had been quite stable after the Federal Reserve Board cut interest rates and re-started bond and mortgage buying among other measures – have been edging up recently.

That’s being attributed to the prospect of a Biden win and the possibility that the Democrats will control both chambers of Congress. Short term rates have risen only a couple of points but 10-year bond rates are more than 30 basis points higher than they were in mid-year.

That steepening of the yield curve relates to an expectation that the Democrats would quickly effect a $US2 trillion-plus relief package in response to the pandemic and, later in the terms, start implementing their multi-trillion-dollar plans to respond to climate change and create health and welfare safety nets.

Spending of that magnitude would greatly increase US debt and deficits but would turbocharge US economic growth and provide the kind of large-scale stimulus that the Fed has said is necessary to respond to the economic impacts of the pandemic.

It would make it more likely that US inflation, stubbornly low since the financial crisis, might finally be rekindled and, in the longer term, allow a normalisation of the US rate structure.

In the near term the big increases in debt and deficits and in the issuance of debt would probably weigh on the US dollar, which has fallen nearly 10 per cent against America’s major trading partners’ currencies since March.

The dysfunctional and contentious response to the pandemic, the civil disturbances, the dive in US economic growth and the imminence of the election are probably the main influences on the currency.

Some analysts, however, see the depreciation as reflecting the decline in America’s standing and trustworthiness during the Trump presidency, where policymaking has been erratic, historic relationships and policies discarded and the dollar’s reserve currency status wielded like a club to enforce the administration’s foreign policy goals.

The stock market broadly likes both the key Democratic spending programs – apart from fossil fuel-exposed companies and pharmaceutical firms the spending and lift in GDP would be good for the market – but isn’t as keen on the promise to undo Trump’s corporate tax cuts and to lift taxes on the wealthy.

If the Democrats win both houses and are able to pursue their agenda, 2021 would see a sharp uplift in economic growth and overall corporate profitability before the increase in the corporate tax rate from 21 per cent to 28 per cent, with a 15 per cent minimum tax, impacted earnings in 2022.

A proposed end to some tax breaks and the taxing of capital gains for the wealthy could also have significant implications for the sharemarket if the “one percenters” decided to cash out their gains while they could.

The damage the Trump administration has done to international relations is probably irrevocable. America’s allies no longer trust it or its commitment to the multilateral agreements and institutions it played such a major role in establishing in the post-war era.

A Biden administration would probably re-commit to the World Trade Organisation, the World Health Organisation, UNESCO and the Paris accord.

It would also try to re-establish America’s pre-Trump relationships with its allies. Its trade policies, other than those directed towards China, would be less aggressive and overtly protectionist.

The Democrats know Trump’s tariff wars have damaged America as much, and arguably more, than those they were directed at but the Biden platform has, nevertheless, a heavy “America First” tinge to it.

If Trump were to win a second term, of course, Americans, and the rest of the world, would get an even bigger dose of Trumpism, unrestrained by any concerns about re-election.
If Trump were to win a second term, of course, Americans, and the rest of the world, would get an even bigger dose of Trumpism, unrestrained by any concerns about re-election.Credit:

There are economic incentives and subsidies for US manufacturers, a ban on foreign companies for government procurements and specific funding for the reshoring of supply chains for the sectors exposed by the pandemic as critical to national interest.

Those policies couldn’t, of course, be reconciled with membership of a pre-Trump WTO. Biden might believe broadly in free trade and globalisation and trade and security alliances but the Democrats’ platform reflects the broader shift in sentiment in the US towards protectionism and economic nationalism.

The Democrats are no friendlier towards China and its economic aspirations than the Republicans and are likely to be more aggressive towards China – and other countries such as Saudi Arabia and Turkey – in response to non-economic issues.

A Biden administration might be less dysfunctional and erratic than its Trump-dominated and tweet-driven counterpart – it might appear more conventional, predictable and professional – but the past four years have changed America, its own convictions and sense of its role in the world and its relationships with the rest of the world in ways that are unlikely to be reversed.

If Trump were to win a second term, of course, Americans, and the rest of the world, would get an even bigger dose of Trumpism, unrestrained by any concerns about re-election.

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