What to expect from the 2020 U.S. elections?
We are now less than a year away from the U.S. presidential and congressional elections. Given U.S. President Donald Trump’s policies in recent years, the outcome of these votes could have significant implications for global investors. Much can still change over the next 12 months, but we can make some educated guesses on what to expect.
It is important to recognize that the congressional elections could be more important in driving policy changes in years to come. Currently, the Democrats have a majority in the House of Representative, occupying 233 out of 435 seats. For the Senate, the Republicans make up 53 out of the 100 seats. This division between the two chambers means it is next to impossible for any major legislation, such as policy on the tax code and healthcare, to receive sufficient support from both the House and the Senate. While numerically possible, it would be difficult for either party to control both the Senate and the House. Only 35 out of 100 seats are up for votes in the Senate and the Democrats would need to outperform expectation to capture a majority. For the House, seat swings are relatively small in a presidential election year. Hence, this is unlikely to deliver the necessary seats to the Republicans.
This implies the current division between the House and the Senate is likely to persist after next year’s elections. Regardless of who wins the presidential race, pushing through legislative changes on healthcare, education or taxes will be an uphill battle.
One of President Trump’s policy hallmarks is his use of executive orders to push his policy agenda instead of going through Congress. This could continue if he is re-elected. History shows that 68% of incumbents get re-elected. Despite his relatively low approval rating versus previous presidents three years into their presidencies, President Trump still can assert influence on the economy, which is enjoying the lowest unemployment rate in decades. This would imply that additional threats against Chinese exports could be toned down. However, a sustained de-escalation in tension is unlikely, since China’s competitive threat is one of the few issues on which both parties have a similar view. Hence, U.S.-China’s tensions on trade, technology and geopolitics are unlikely to ease even after these elections.
Democratic candidates have quite a wide variation of policy advocates. For example, ex-Vice President Joe Biden is looking to reverse the 2017 Trump tax cut. Elizabeth Warren, who has gained greater support in recent weeks, looks to impose a wealth tax on the rich and additional taxes on large companies, break up big tech firms and banks, as well as ‘Medicare for All’ with no private healthcare option. However, as noted above, these policies would be hard to implement unless the Democrats have a “three of a kind” in their hands, namely the White House, the Senate and the House of Representatives.
EXHIBIT 1: S&P 500 RETURNS AND VOLATILITY DURING ELECTION YEARS
Source: Standard & poor’s, FactSet, J.P. Morgan Asset Management.
Data reflect most recently available as of 31/10/19.
Investment implications
Since 1932, the S&P 500 index underperformed in an election year (5.8% on average) versus a non-election year (9.3% on average), as well as enduring higher volatility. Granted, each election cycle has its own economic and policy dynamic. Nonetheless, this is consistent with investors’ psychology that candidates’ campaign pledges could influence investor sentiment in an election year, especially sectors and companies that candidates are targeting. In this case, large tech companies, healthcare and pharmaceutical firms, and banks could experience more volatility as their business environment could be affected.
For the Federal Reserve, it may prefer to stay put as we get closer to the elections. Nonetheless, their policy outlook is likely to be determined primarily by incoming economic data and the progress of U.S.-China trade negotiation. Given the recent stabilization in manufacturing data, the Fed is likely to keep rates unchanged in coming months.
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