American voters will be asked to make three key decisions on 3 November. The main focus will clearly be on who wins the keys to the White House, but a president’s ability to achieve their policy goals is influenced by which parties control the two arms of Congress: the House of Representatives and the Senate. If Congress remains divided between the Democrats and the Republicans as it is today, the winner of November’s contest will rely heavily on unilateral action taken via executive orders and rulemakings through the federal government via the department and agencies that have significant power. Enacting larger policy proposals requires approval by Congress and the winner of the election would have a much tougher time enacting that part of their agenda. Exhibit 1 shows the numbers needed to win each race.  

The electoral college The presidential candidate that wins the most number of votes (or wins “the popular vote”) does not automatically become president. Instead, the US employs an electoral college system. Votes are tallied at a state level, and the winner in each state earns the “electoral votes” that belong to that state (with the number of electoral votes in each state determined by population size). A candidate needs to win at least 270 of the 538 electoral votes in order to win the presidency. 

The Senate US senators serve six-year terms, which means that roughly a third of the 100 Senate seats are up for grabs at each federal or mid-term election. Currently the Republicans control the Senate. There are 35 seats up for election this year – 23 currently held by Republicans and 12 currently held by Democrats. To win control of the Senate, the Democrats would need to keep all of their existing seats and flip three seats if they win the presidency, or four if they do not, as the vice president casts tie-breaking votes. 

The House of Representatives Each of the 435 seats in the House are up for election in November, with the winners serving a two-year term. Currently the Democrats control the House. For the Republicans to win back control, they would need to win 21 additional seats and hold on to two vacant seats that were previously held by Republicans. 

Members of both the House and the Senate serve on a wide range of committees. The Senate has the authority to approve presidential nominations - such as Supreme Court justices and members of the Federal Reserve Board. Polls at the start of October suggested that the Democrats have a strong chance of retaining the House, while the Senate race is very tight.

Exhibit 1: Votes or seats in the Electoral College, the Senate and the House of Representatives

Source: 270 to Win, The Cook Political Report, J.P. Morgan Asset Management. *In 2016 Trump earned 306 pledged electors, Clinton 232. They lost, respectively, two and five votes to faithless electors in the official tally. **51 seats are needed for a simple majority if the dominant party in the Senate is not represented in the White House. If the president and majority party are the same, only 50 seats are needed for a majority because the vice president casts the tie-breaking vote. 2016 numbers include two independents that vote with the Democrats. Data as of 30 September 2020.

Following several surprise outcomes around the world, the reliability of election polls has been increasingly called into question over recent years. The electoral college system in the US adds a further complication, as national polls that accurately predict the winner of the popular vote may not predict the next president. 2016 is a good example, when Hillary Clinton won the popular vote (as predicted by the polls) with 48.2% of the vote, versus Trump’s 46.1% share. Yet as the polling data over-estimated the margin of victory, President Trump ultimately emerged the victor with the most electoral votes. National polls should therefore not be treated as a wholly accurate forecast of who will become president, but can still be useful to gauge candidates’ momentum. Similarly, betting odds can provide a helpful steer on the likelihood of different outcomes but are also fallible. Odds reflect the weight of money behind different views, which will not always match the composition of the electorate.  

We are primarily focused on regional polls for the “swing states”, which are the states that are likely to have the largest influence on the outcome. In 2016, President’s Trump’s victories in Michigan, Pennsylvania and Wisconsin – three states that were expected to turn blue – by just over 100,000 votes in total, were key to his success. This year, polls in October show Biden is ahead by a healthy margin in each of these states, with tighter races in three others that voted for Trump in 2016: Arizona, Florida and North Carolina (see Exhibit 2). In aggregate, the majority of polls suggest that the Democrats hold a material lead at this stage. But as for any of these events, our energy is better spent planning for a range of different scenarios, rather than trying to predict the outcome.

Exhibit 2: Trump vs. Biden swing state poling since 1 July

Percentage point spread

Source: RealClearPolitics.com, J.P. Morgan Asset Management. Data as of 28 September 2020.

The coronavirus outbreak had a significant impact on the primary season - the process by which Democratic and Republican presidential candidates are formally nominated. Both parties’ conventions in August were also heavily impacted, with the usual razzmatazz and vast cheering crowds replaced with significantly scaled down events that were primarily held virtually. 

While election day may well look very different to any other seen before in the US, it will still take place on 3 November. Presidential elections are set in federal law to take place on the Tuesday after the first Monday in November, and for this to be changed, approval from the Democrat-controlled House of Representatives would be required.

The impact of social distancing requirements on voter turnout is unknown, but will be particularly important for the Democrats’ prospects given the distribution of the electoral college. Mail-in voting has been rising in availability and popularity in recent years (see Exhibit 3) and will be a much larger feature of this year’s election: more than 20 states have increased the flexibility of mail-in voting eligibility so far this year. With many states not starting the counting process for mail-in ballots prior to election day, it is quite likely that markets will open on 4 November with the result still unclear. Given markets’ dislike of heightened uncertainty even in the short term, investors should be prepared for elevated volatility around the election result, regardless of the outcome.   

Exhibit 3: Method of casting ballot over time

Percent, proportion of electorates

Source: US Census, J.P. Morgan Asset Management. Data as of 30 September 2020.

President Trump entered 2020 with strong momentum behind his campaign. The US economy was bouncing back, the S&P 500 was hitting fresh all-time highs, and the ink was drying on a phase one trade deal between the US and China. An incumbent president has won re-election 63% of the time, and since the American Civil War, only those who experienced an economic recession during their first term were unsuccessful.

While this year’s plunge in economic activity could significantly diminish the chances of a Trump victory, the critical swing factor is likely to be the public perception of the president’s management of the Covid-19 crisis. Trump’s approval ratings declined for much of the summer, ending June at their lowest level since February 2019. Yet these numbers have been steadily improving since July, which has coincided with an improvement in the US health situation (see Exhibit 4).

The US-China relationship will be another important factor, and the “America First” message is again a core pillar of the Republican campaign. Tensions between the two economic superpowers have risen, with this year’s purchase commitments in the phase one deal unlikely to be fulfilled given the precipitous drop in global trade. Both sides have taken steps to escalate hostilities, although importantly the measures have stopped short of a return to the tariff-based dispute that had such a significant impact on capex intentions and corporate confidence for much of 2018 and 2019. Reports that discussions between trade negotiators at the end of August were constructive helped to ease investor fears in the short-term, and may suggest a reluctance from the US administration to risk triggering further market volatility ahead of November.

In addition to the tough-on-China and tough-on-trade stances, infrastructure is likely to be another key focus. The first job for whoever controls the White House in 2021 will be to help businesses and workers recover from the coronavirus outbreak. Trump had already flagged his desire for a second round of tax cuts prior to the outbreak, but with US national debt-to-GDP set to rise above 100% in 2020, this may restrict options for further tax cuts and spending. (Tax cuts would also require the co-operation of Congress, which would be highly unlikely without Republican control of all three chambers.) If the next administration is not willing to rein in federal spending, this poses the risk of a spike in inflation and higher bond yields further down the road.

Exhibit 4: President Trump approval rating

Percent

Source: Bloomberg, RealClearPolitics.com, J.P. Morgan Asset Management. The line shows the RealClearPolitics average of a wide range of approval polls. Data as of 28 September 2020.

Stock markets had previously reacted negatively to the momentum of progressive Democratic candidates. Commitments to “break up big tech”, to abolish private medical insurance, and to aggressively raise corporate taxes had attracted particular attention. Yet, as the most left-leaning candidates exited the race, so did their policies. Since becoming the frontrunner, Biden has adopted more progressive attitudes towards student debt reform and released more robust climate change and healthcare strategies. Biden’s proposals to raise corporate taxes, albeit by less than that proposed by Sanders or Warren, are receiving close attention. This issue has significant implications for the outlook for company profits, after Trump’s corporate tax rate cut from 35% to 21% boosted US corporate earnings by an estimated 8%-10% in 2018. We note however that if the Democrats are victorious in November, tax hikes and major changes to tax policy would only be possible if the Democrats take full control of Congress. They would not be considered as a stand-alone measure, but potentially as part of a comprehensive stimulus and social safety net bill.

Investors will also be watching for a clearer steer on Biden’s proposed approach to China. The Democrat campaign team has been keen to emphasise their candidate’s tough-on-China credentials, a topic where views across the US electorate have strengthened in 2020 (Exhibit 5). In contrast to President Trump’s preference for bilateral negotiations, Biden has pledged to build alliances with other nations when approaching foreign policy. While trade tensions will likely remain present regardless of the election outcome, a multilateral (and therefore more predictable) approach of a Democrat administration could help to remove some of the risk premium currently embedded in emerging market assets.

The Democratic vice-presidential candidate pick was more eagerly anticipated than normal this year, in part due to Joe Biden’s age and his reluctance to commit to serving a second term. Polls suggest that the choice of Kamala Harris has been broadly well received, and the announcement also gave a boost to the Democrats’ fundraising efforts. From a market perspective, Harris’ relatively close alignment with Joe Biden’s policy views means that the selection does not have a significant impact on the implications of a Democrat victory.

Exhibit 5: Proportion of US voters who have an "unfavourable" opinion of China

Percent

Source: Pew Research Center, J.P. Morgan Asset Management. Survey conducted between 16 June – 14 July 2020.

Typically, returns are lower and volatility is higher in election years than in non-election years (see Exhibit 6), although these averages are significantly skewed by major recessions and market events in recent election years. Returns and volatility in 2020 will clearly be primarily attributable to Covid-19, but below we highlight three areas that are likely to influence market sentiment.

1. Roadmap for the rebound

Top priority for whoever leads the next US administration will be to manage the economy as it restarts in earnest in 2021. Government finances have been stretched by the vast fiscal packages approved so far and tough choices will need to be made about whether to push ahead with further stimulus, or to try to tighten the belt as the recovery gets underway. The Federal Reserve (the Fed) may come under increasing pressure to keep yields low, although if this pressure is so strong as to cause investors to question the Fed’s independence, there is a risk that longer-dated yields could be pushed higher.

2. US–China relations

The US-China relationship is back on a worrying path. The hit to both business confidence and investment intentions across the globe in 2019 highlighted the economic damage that was caused by the trade war. The recent disagreement has focused on non-tariff based measures, but a return to tariff-based escalation remains a risk. The multilateral approach to trade negotiations proposed by the Democrats could provide support for emerging market assets in the scenario of a Democrat victory.

3. Progressive policy proposals

The most progressive policies moved out of the picture as the most progressive Democratic candidates exited the race. Yet it is still evident that Joe Biden’s vision for corporate America is clearly different to President Trump’s. Democratic proposals for the use of anti-trust legislation to clamp down on “Big Tech”, plans for corporate tax changes and how to shore up the healthcare system are all matters that warrant close attention.

The question of which election outcome would be most positive or negative for the stock market is one that we receive frequently. Yet when comparing the policy proposals of both parties, we expect that the impact over the medium term is more likely to be seen at a sector level than at the overall index level for US equities. Corporate tax proposals appear to be the clearest difference between the two parties, but the direction of travel is more similar on other key topics such as mega-cap regulation and US-China.

Exhibit 6: S&P 500 price returns                                  S&P 500 realised volatility 
Percent, average return from 1932-2019                  Percent, 52-week standard deviation of price returns, 1932-2019          

Source: FactSet, Standard & Poor's, J.P. Morgan Asset Management. Data as of 30 September 2020. Past performance is not a reliable indicator of current and future results. 

Technology and healthcare stocks have been a key driver of the rapid bounceback in US stocks since March, which saw the S&P 500 take less than 150 days to recover from the 34% decline witnessed earlier this year (Exhibit 7.) Given the high weights of these two sectors in the US market, we asked J.P. Morgan Asset Management’s US equity sector specialists for their views on the potential impact of the election.

Technology - Kris Erickson "Internet companies are under the microscope from both parties, though their focus is different. Democrats have expressed concerns around the market power of large technology companies and are pushing for more action on curbing hate speech, while Republicans are most focused on bias in the way that information is presented. With the current administration already having backed ongoing investigations by both the Department of Justice and the Federal Trade Commission into the internet giants, I don’t expect a Biden presidency to result in a meaningfully different situation. If the Democrats were to win the Senate and House, there’s a greater risk around new antitrust laws which could make it easier to bring a case against these companies. On corporate taxes, internet companies did previously benefit from the Republican tax cuts, although the earnings contribution was relatively modest."  

Healthcare - Laurence McGrath "The scenario of a Biden victory - particularly with a Democratic sweep of Congress - could create some concern initially about the prospects for healthcare reform. Yet while initial healthcare proposals may be aggressive, I am more positively biased about what could emerge under a Biden presidency. Healthcare is not his number one focus, and it is also clear that healthcare providers, doctors and hospitals have been hit very hard during the Covid crisis. Biden’s clearest priorities are to strengthen the legacy of Obamacare (the Affordable Care Act, or ACA) and to take actions to lower the number of uninsured and underinsured citizens. More people with better insurance would be positive for the sector, and this could be achieved without the most controversial proposals such as a broadly applicable “Public Option” – a government-funded health insurance option that would sit on the marketplace alongside private alternatives. A corporate tax hike would however be negative for healthcare services companies, and there is also less clarity about what actions might be taken on drug pricing." 

Exhibit 7: US equity returns in 2020

Index level, rebased to 100 in Jan 2020

Source: MSCI, Refinitiv Datastream, J.P. Morgan Asset Management. US equities represented by the MSCI USA headline and sector indexes. Total returns shown in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 26 September 2020.

As both parties’ policy proposals become clearer, the potential sector impacts of different election outcomes are wide-ranging. Below we ask three more of J.P. Morgan Asset Management’s U.S. sector specialists for their views.

Financials - Steve Wharton "For bank stocks, the scenario of a Trump re-election would likely be more favourable than a Democrat win. Several of Biden’s policy proposals could act as headwinds for the sector, including higher corporate taxes, a bank liability tax, and a potential modernisation of the Glass-Steagall act (which separated investment banking from commercial banking activities). The regulatory outlook may also be tougher under a Democrat White House. I would not expect Trump to pursue any major new financial regulations in a second term, nor would I foresee a move to increase the corporate tax rate." 

Utilities – Leslie Rich "I would expect the scenario of a Biden administration to be friendlier towards renewable energy. This could manifest itself in an extension of tax credits for wind, solar, and battery storage that could cause utilities to continue to retire coal plants and replace the capacity with cleaner sources. The Environmental Protection Agency may push for regulations that make fossil emissions more onerous and costly. Fossil infrastructure such as pipelines and LNG (liquefied natural gas) export facilities would also face greater hurdles. Electric transmission spending would likely increase to interconnect more renewable generation as penetration increases. Offshore wind is a nascent industry in the U.S. with many international companies seeking to participate in the growth." 

Energy - David Maccarrone "The re-election of President Trump would likely have a limited impact on the global energy sector. In contrast, a Biden administration would likely accelerate the decarbonisation and electrification of energy - a structural shift in energy demand and investment. This would likely be a negative for the energy sector, especially US-centric companies. A combination of executive orders, federal agency-led policy initiatives and new legislation would likely slow fossil fuel demand growth. Higher corporate tax rates, more challenging infrastructure permit requirements and restricting permissions to drill on federal lands all represent Biden priorities. Re-engagement with Iran could mean more oil supply." 

Exhibit 8: US Corporate tax rates

Percent, maximum corporate tax rate

Source: IRS, joebiden.com, J.P. Morgan Asset Management. Data as of 30 September 2020.