Phillip Macro – U.S Elections Scenario Analysis September 25, 2020 808

  • Based on current betting odds, a Democrat sweep in the Senate, House and presidential elections appears to be the most likely outcome in November 2020. A blue wave has the highest 35.1% chance of occurrence.
  • Across the scenarios, a Democratic President historically led to higher market returns than a Republican President.
  • We summarise the key impact of the different election scenarios below.

 

This article is part of the US election series brought to you by POEMS. #USelection2020

 

Probabilities of Political Scenarios

Based on current betting odds, the Democrats appear poised for a clean sweep in the upcoming Senate, House and presidential elections. The odds for a blue wave are the highest, at 35.1%. The next most probable outcome is a Trump re-election but with a united Democratic Congress. This outcome has a 24.8% chance of occurrence.

 

Historical Returns under Different Political Scenarios

Based on historical returns from 1928 to 2019, the highest returns were delivered during a term with a Democratic President and unified Republican Congress. In the event of a blue wave, the S&P 500 historically posted annual returns of 12.26%, beating their average across the years. Across the scenarios, a Democratic President tended to lead to higher market returns than a Republican President.

This could be due to difference in policy choices. The Republicans tended to stimulate the economy through tax cuts, which may have a lower fiscal multiplier (Figure 1). On the other hand, the Democrats preferred to stimulate consumption through infrastructure spending and redistribution policies, which may carry a higher fiscal multiplier. A higher fiscal multiplier will in turn drive higher economic growth. This can be supported where historically, U.S. annual real GDP growth under a Democratic president averaged to be around 4.26%, while annual real GDP growth under a Republican president averaged to be only around 2.31%.

 

Scenario Breakdown: Likely Impact Across Key Areas

Blue Wave (D-D-D)

U.S. – China Relations: The President tends to set the tone for foreign policy. De-coupling with China may continue. However, the approach may be multilateral and less hostile, with the US working through the WTO and with allies to impose pressure on China. Biden aims to reinstate the TPP and “re-evaluate the tariffs upon taking office”. This suggests that tariffs may remain status quo or even be rolled back, which would be positive for international trade.

Fiscal Stimulus: Biden has proposed a US$2 trillion green-energy, jobs and infrastructure plan over four years. His bold plan is more likely to be passed with a unified Congress, which will help offset some impact from proposed tax increases. The fiscal deficit will continue to widen, regardless of who becomes President.

Regulations: Biden may seek to reverse Trump’s deregulatory actions or increase oversight in three major areas: environment, finance and the technology sector. Generally, increased regulation results in high compliance costs for companies, which hurt corporate profits. Certain regulations, such as data security, may be passed more quickly than others such as anti-competition.

Tax Policy: US corporate tax rates may be raised from 21% to 28%. Generally, tax increases dent business sentiment but the impact may be attenuated by fiscal spending. Increases may also be gradual, depending on the pace of the U.S. recovery from Covid-19. The impact of tax increases on corporate profits may thus be limited.

Monetary Policy: Monetary policy tends to be apolitical. Historically, Biden tended to respect the Fed’s autonomy. We think the Fed’s “whatever it takes” support for economic growth will continue, regardless of who becomes President.

 

Biden Win (D-R-D)

U.S. – China relations: – Same as above –

Fiscal Stimulus: Bold spending may be met with resistance from the Senate. Biden’s proposed fiscal spending may be deemed too ambitious, leading to a reduced budget. However, fiscal measures should continue to play out to aid economic recovery. The fiscal deficit is likely to widen further, regardless of who becomes President.

Regulations: Increased regulation and oversight may face some resistance from a Republican Senate. Republicans are generally deemed more business-friendly and known to favour limited government regulation of the economy. As such, regulations may take longer to be passed or deregulation may continue.

Tax Policy: Proposed tax increases may face resistance from the Senate. Tax increases may be lower than proposed or even rejected. With lesser tax revenue, proposed fiscal spending may be affected.

Monetary Policy: – Same as above –

 

Trump Re-Election (R-R-D) – Status Quo

U.S. – China Relations: The President sets the tone for foreign policy. A tougher stance on China may be expected, with risks of further tariffs on non-compliance. De-coupling with China may pick up speed. Trump will also likely proceed to pull out of TPP, which creates uncertainties over international trade.

Fiscal Stimulus: Trump previously signalled that infrastructure packages would focus on transportation projects and 5G wireless infrastructure. He has no intention of spending on green energy. Fiscal spending may be tilted towards an economic recovery from Covid-19. However, a split Congress may slow the fiscal rollout, as seen from the current fiscal-relief deadlock.

Regulations: Status quo. Investors expect the pro-business environment to continue under any second term for Trump.

Tax Policy: The Tax Cuts and Jobs Act is set to expire at the end of 2025. The tax bill may be extended, with the depth of tax cuts potentially compromised. Trump faced resistance to his tax-cut policy from all Democrats in 2017. Push-back is expected to continue.

Monetary Policy: Monetary policy tends to be apolitical. Trump has a history of pressurising and tampering with the autonomy of the Fed. He may call for slower interest-rate rises, which are already in line with the Fed’s dovish stance of ‘lower for longer’ rates until at least 2023. The Fed’s “whatever it takes” support for economic growth will likely continue regardless of who becomes President.

 

Red Wave (R-R-R)

U.S. – China Relations: – Same as above –

Fiscal Stimulus: With a united Congress, fiscal spending focused on an economic recovery may be passed at a faster pace. Trump previously signalled that infrastructure packages would focus on transportation projects and 5G wireless infrastructure. These are likely to be passed.

Regulation: Trump considers his long parade of deregulation as one of his greatest achievements.  Relaxed business regulation and a pro-business environment should continue. Deregulation may occur faster with a unified Congress and enforcement of current rules may be further eased.

Tax Policy: The tax bill may be extended with low risks of being compromised. Further tax cuts are possible.

Monetary Policy: – Same as above –

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Joseph
Joseph

What about the black swan event, if Biden won and Trump refuse to leave?

About the author

Profile photo of Yeap Jun Rong

Yeap Jun Rong
Research Analyst
Phillip Securities Research Pte Ltd

Jun Rong currently covers the U.S market, with focus on FAANG stocks. Previously an investment specialist, he constantly keeps in touch with the latest market trends to serve the needs of clients. Jun Rong also features in different media platforms such as Channel 8’s Morning Express show and provides market commentary for various newspaper like LianHe ZaoBao (联合早报) and Business Times. Jun Rong graduated from National University of Singapore (NUS) in 2017 with a Bachelor of Social Sciences with major in Economics.

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