Portfolio Adviser • PA Feb 20 • Counterpoint

The US presidential election in November will be the standout global political event of the year. The outcome could have significant ramifications for US domestic and foreign policy, with very meaningful investment implications.

While it seems likely Donald Trump will have the Republican nomination, there is less clarity on who will lead the Democrats. Current polls indicate three front runners: Joe Biden as the more centrist candidate, and Elizabeth Warren and Bernie Sanders from the left wing.

Warren and Sanders are advocating radical policies, including an overhaul of the healthcare system, breaking up big banks and tech firms, a fracking ban, and imposing wealth taxes and higher corporate taxes. Biden’s proposed policies are comparatively moderate but still include reversing the 2017 tax cuts.

Pete Buttigieg, though currently less favoured, is another candidate worth watching – and it is not yet clear exactly how the late entry of Michael Bloomberg will influence the race for the Democratic nomination.

Support can swing wildly. For example, Barack Obama overturned a significant lead in the polls for Hilary Clinton to win the Democratic nomination and ultimately the 2008 election.

A clearer picture of who the Democratic nominee will be should emerge by the end of March, when two-thirds of the primary results are known.

The primaries are followed by the party conventions when the candidates are traditionally selected, although given the high number of Democrat candidates, this process could drag on.

Then it’s to the presidential debates in the Autumn, before the vote on 3 November.

History strongly favours the incumbent: three-quarters of sitting presidents have been re-elected, looking at elections going back to 1932.

An incumbent president has never failed to win re-election unless a recession has occurred during their time in office, which perhaps explains the president’s more conciliatory recent tone on trade.

However, Trump’s approval ratings are lower than those of other re-elected presidents at this point in the election cycle.

It is worth bearing in mind the impact 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 seems unlikely that Trump will regain control of the House of Representatives, were he to win. Similarly, it is difficult to see the Senate shift to a Democrat majority. And so a divided Congress appears the most likely outcome. While political gridlock is not an ideal scenario, it may comfort investors to know it could act as a considerable restraint on some of the more radical proposals on both sides.

Regardless of the outcome, the trade war with China is unlikely to be fully resolved. Surveys suggest there remains widespread support among the US electorate to address unfair trade practices, while on certain areas of the disagreement – such as China’s state-led subsidies for its tech sector – there appears to be no common ground.

The US administration does appreciate it needs to get the balance right between keeping the agenda alive and damaging the US expansion. Yet the extent to which a more measured approach to negotiations could boost corporate sentiment in 2020 and help drive a bounce-back in business investment remains to be seen.

It is hard to say anything concrete about the election’s impact on markets. Historically, S&P 500 volatility has been higher in election years than in non-election years, as markets often reprice the probability of the future administration’s policies.

Markets have tended to react more positively in the immediate aftermath of the election of a Republican president, as the party’s policies are seen as market friendly. But this is by no means a rule of thumb, and other geopolitical and economic events may carry more influence.

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