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Day three reaction to the US elections

06 November 2020

The Presidency

Three days on and the election continues in states that are key to winning the Electoral College.  As I write, Joe Biden has just taken the lead in Georgia and is gaining ground in Pennsylvania.  He was already leading in Arizona and Nevada. None of these key states has fully counted the votes, but if they stay as they are, Joe Biden will have a big lead in the Electoral College. In a press conference, President Trump appeared to concede that Biden is likely to win the election if all votes are counted. However, he asserts that the postal vote was corrupt and claims he won. Most of Trump's recent tweets have been qualified by Twitter with a warning that they may not be true. It is clear he will dispute the result in the courts, although he has not yet presented evidence for this assertion. In addition, he plans to request a recount in Wisconsin where the margin was less than 1% and may do the same in other states. Recounts cannot be asked until the count is certified which may not be for another few days. Everyone knew that he would dispute the result if he lost. As a result, every election official that has spoken since the election has stressed that they are scrupulously following the rules and making sure that all the legitimate votes are counted. In Georgia, the Governor is Republican, as are most of those responsible for running the election. This may be very frustrating for the President as Biden gains ground in key states, but it makes it very unlikely that he can overturn what looks, more and more, like a Biden victory.

Congress

The Senate race is not over but it looks like the Republicans will just retain control here.  The margin will not be decided until run-off elections are completed in January. In the House of Representatives, the Democrats have lost ground but are expected to retain control. To summarise, it looks likely that we could have a Democrat President, Republican Senate and a Democrat House of Representatives. The question is what this split means for investors.

Implications

Firstly, fiscal stimulus. It is important to remember that both sides want more fiscal stimulus to counter the effects of the pandemic. The disagreement was whether it should be $2.2 trillion or $1.8 trillion, and how it would be implemented. The existing congress sits until the New Year so it is hoped that there will be progress on this measure. The danger is that President Trump is so absorbed in litigation that he refuses to do anything. If he has an eye on another shot at the presidency in 2024, he may not want to hold this up.  A deal will be done, but right now delays are damaging the US economy.  The Federal Reserve is taking every possible action but they have called for more fiscal action. Biden has talked about taking the Trump tax cuts and putting tax on repatriated overseas earnings. The Republican Senate may block this, which will be welcome for some of the large tech companies in particular. Biden has a great deal of experience in international relations.  He is more likely to seek international cooperation, which should be good for the relationship with NATO and the European Union. 

UK relationship

The UK has long had a "special relationship" with the United States. President Trump saw Boris Johnson as the British Trump. Biden may also see Boris as the British Trump, which may not serve in the UK's interest. While Trump thought Brexit was a good idea, Biden thought it was a mistake. In particular, he would be against anything that endangered the Good Friday Agreement in Ireland. This could make getting a US/UK trade agreement post-Brexit harder. As a result, the negotiations with the European Union over the post-Brexit relationship are even more pertinent. These continued this week without a deal and will continue next week. On climate change and military cooperation through NATO, the UK-US relationship may be better with a Biden presidency.

Market reaction

The day after the election saw a 4% rally in the S&P 500, the US equity index, which was one of the most positive reactions ever to a US presidential election.  It was up again the next day.  This has been led by the tech sector, with the tech-heavy Nasdaq Index up 8% over two days. The US treasury market rallied with long dated yields falling. This did not help bank stocks and value orientated stocks generally underperformed growth. This largely reversed the moves that had taken place in the week before the election.  Very far from the stock market collapse that President Trump predicted during the campaign if Biden won. This morning, we are seeing US equities slightly lower but this may be down to news on Covid-19 where a new strain is reported to be spreading in Denmark.

Conclusion

The US election has been extremely divisive and legal disputes will only make things more bitter. Trump will not leave the White House without a fight, and even if he is ousted, he will continue to tweet and may be back for another shot at the presidency in 2024. In the end we expect Biden will win, but with a Republican controlled Senate, he will not be able to enact some of his proposals.  For now, a stimulus package should eventually be agreed and interest rates and other monetary policy will continue to support both bond and equity markets.  The pandemic continues and Biden may bring in tighter restrictions. For investors, as we go into the New Year, news of a vaccine may be much more important than the US election.

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