Today marks election day for the US, not only for the US presidency but also for 435 seats in the House of Representatives and 35 seats in the Senate, the two chambers forming the US Congress.
Former vice president Joe Biden has managed to maintain a steady lead over incumbent president Donald Trump with a significant advantage of on average 9pp, in national polls. This represents a larger lead for the Democrats than the 2016 election, when Secretary Hilary Clinton led by on average 5pp.
Nevertheless, polling in swing states have historically shown to be more important for the election outcome. On this front, the Democratic party’s nominee holds a narrower lead over Republican President Trump. Together with the increase in mail-in voting, which further complicates predicting turnout, or simply because polls have got it wrong in the past, despite that the odds are favouring a Biden win, the election outcome is still highly uncertain.
For the equity markets, the election outcome results in different policy implications. The key investment focus in this US election is on five main policy themes, mainly: the consequences on US corporate taxes, infrastructure spending, health care, energy and trade.
Given that we have already lived through Trump’s first term, we can expect a continuation of the current policy positions. However, if polls are correct, a win by former vice president Biden is expected to lead to wider implications on equity markets.
The biggest concern is that the Biden administration is supportive of a corporate rate tax hike, from the current rate of 21 per cent to 28 per cent, which Trump had reduced from 35 per cent. Even so, a Democratic win is expected to result in a larger fiscal stimulus package. The additional round of fiscal stimulus in the US was largely delayed due to the disagreement between the Republicans and Democrats over the size of the fiscal package needed to support the economic downturn. While the Trump Administration proposed a $1.8 trillion stimulus package, the Democrats insisted on at least $2.2 trillion, which was not accepted by the Senate Republicans.
In terms of energy, while Trump has made his position on climate change (or lack of) abundantly clear, confirmed by the withdrawal from the Paris Agreement, a Biden administration is expected to push forward a transition away from fossil fuel and towards clean energy. From a trade perspective, despite still pushing for concessions, a more diplomatic approach to the China trade relations is expected under a Biden presidency.
Nevertheless, despite that the Presidential result is important, the Senate majority, which is currently under Republican control, matters more in terms of the ability to push policy into action. Irrespective of the Presidential result, if the Republicans continue to hold a majority in the Senate, the size of the fiscal stimulus is likely to be on the lower end of the range. On the other hand, under a “blue wave” scenario, with a Democratic win of the Presidency and Senate, the amount of government spending to support the economy is expected to be higher.
The importance of the US election outcome and as a result, the size of the covid-19 relief package for the US economy, is even more critical now, as concerns over the resurgence of a second wave of the covid-19 pandemic once again cloud the economic outlook.
Disclaimer: This article was written by Rachel Meilak, CFA, equity analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd which is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
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