Elections always prompt talk about how the financial markets and in particular, equities will be impacted. It has been no different with today’s US elections, but how much of a difference will the election results really have on equities?
When it comes to elections, there are two things the markets will be looking at. Firstly, what is the chance of political uncertainty? In other words, how likely is it that there won’t be a clear winner shortly after the voting window closes. The markets hate uncertainty and political uncertainty can creates short term volatility. The second focus point is the possible changes in fiscal policies. This is one of the longer-term factors to take into consideration. In the case of the US elections, Democrat nominee Joe Biden plans to raise corporate and capital gains taxes. At the same time, he plans to inject a significant amount of coronavirus stimulus into the economy. If Biden were to win, we would see a big shift in fiscal policy that will impact both investors and businesses. Meanwhile if Trump were to win, there would be little change in the tax or spending policies.
In the weeks building up to the elections, the markets have been jittery due to the risk of a contested election. Earlier in the year, the markets were more concerned about a Biden presidency because of his less ‘market-friendly’ policies, but now the markets will be happy to simply get a clear result. In the last US session before the election polls closed, equities posted a strong rally, seemingly pricing in a ‘blue wave’. Are the markets getting ahead of themselves or do they simply not care?
Realistically, it’s probably a combination of both factors. In the short term, the election results could create extra volatility in the markets, but in the longer term, it doesn’t matter too much as to who comes in. History tells us that over a long period of time, equities will move higher regardless of who is in the White House, so why would this year be any different?
We also have a global economy recovering from the coronavirus pandemic, which we expect to continue over the next two years. Equities will push higher provided that the recovery remains broadly on track, regardless of who the President is. The only real impact the elections could have over the next four years is determining how far equities push to the upside. Therefore, many traders may have looked at the recent downside in equities and decided that the prices were simply too good to refuse.
In the short-term we have the risk of a contested election, but any downside in equities from that scenario would be faded in the coming months. If the elections resulted in a sweep for the Democrats, there is a strong possibility that Biden will hold off on tax increases until at least 2022. Hiking taxes next year whilst also injecting stimulus into the economy would be counterproductive. A strong stimulus package could boost the economy over the next twelve-months, after which we could expect to see tax hikes across the globe as governments attempt to recover the debt accumulated this year.
Although the markets always make a big deal out of elections, we should remember that for equities, this is only a short-term risk event and in the long-term, a bullish trend should remain intact. As we get through the elections and the path ahead becomes clearer for the markets, I will be looking to scale into a broad recovery portfolio, which includes long equity indices.