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 significantly 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 have a much tougher time enacting 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. 

While members of both the House and the Senate serve on a wide range of committees, the House is responsible for introducing spending and tax bills, giving it greater sway over the government’s finances. The Senate has the authority to approve presidential nominations - such as Supreme Court justices and members of the Federal Reserve Board. Betting odds at the start of June put a Democratic sweep of the House and the Senate as the most likely outcome, marginally ahead of a continuation of the status quo. 

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 31 May 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, which in early June pointed to a very tight race. These odds are also fallible, however, as they reflect the weight of money behind different views, which will not always match the composition of the electorate.   

It may be more instructive to focus on regional polls for the “swing states”, which are the states that are likely to have the tightest races. 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 at the end of May show Biden leading in each of these states, as well as leading in three others that voted for Trump in 2016: Arizona, Florida and North Carolina (see Exhibit 2). We will be watching the regional polls in these six states extremely closely as we move through the autumn. But as for polling data for any political event, an appropriate margin for error must be factored into any analysis.  

Exhibit 2: Trump vs. Biden polling in swing states since 1 March

Spread, percentage points

Source: RealClearPolitics.com, J.P. Morgan Asset Management. Each dot represents a different poll. Data as of 31 May 2020.

The coronavirus outbreak has already had a significant impact on the primary season - the process by which Democratic and Republican presidential candidates are formally nominated. After state lockdowns began in earnest in mid-March, 16 states and one territory either postponed, cancelled or switched their primaries to vote-by-mail with extended deadlines. The Democratic National Convention, at which the Democratic candidate is officially nominated to represent the party in the presidential election, has been delayed by a month to 17-20 August, a week before the Republican National Convention.

While election day may well look very different to any other seen before in the US, the 3 November date is not likely to move. 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.

It appears that social distancing is highly likely to be required in some form and may threaten voter turnout, which is particularly important for the Democrats’ prospects given the distribution of the electoral college. Non-traditional voting methods have been rising in availability and popularity in recent years (see Exhibit 3), but Democratic proposals for further expansions in 2020 have so far been met with strong opposition by the Republicans. 

Exhibit 3: States permitting different methods of alternative voting

Number of states

Source: Pew Research Center, J.P. Morgan Asset Management. Data as of 31 May 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.

It is now clear that the impact of Covid-19 has pushed the US economy into recession, with the unemployment rate hitting its highest level since the Great Depression. While the economic downturn 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 this crisis. So far, Trump’s approval ratings have held relatively steady since the start of the virus outbreak, although they have lagged the jump in many other global leaders’ approval ratings (Exhibit 4).

The US-China relationship will be another important factor. Tensions between the two economic superpowers are on the rise, with this year’s purchase commitments in the phase one deal unlikely to be fulfilled given the precipitous drop in global trade. Trump’s “America First” message will again be a core pillar of his campaign. Investors will be wary of any pressure on US companies to “re-shore” manufacturing activity that takes place overseas given the potential implications for costs and profits. In our view, however, while companies globally will likely look to ensure that their supply chains are suitably diversified in light of this year’s supply chain “stress test”, China’s position at the heart of the global supply chain looks secure, in part given the country’s dominant position in global manufacturing activity.

President Trump is yet to lay out a clear agenda for a second term, but 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. 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: Evolution of country leader approval ratings in 2020

Percent

Source: Morning Consult Political Intelligence, J.P. Morgan Asset Management. Data is based on an average of over 3,000 weekly interviews per non-US leader, and over 49,000 weekly interviews for Trump. May data is based on surveys conducted 20-26 May, 2020.

The race for the Democratic nomination has now been whittled down to one presumptive presidential candidate, former Vice President Joe Biden. While the nomination won’t formally be confirmed until the Democratic National Convention in August, battle lines have already been drawn for November’s contest.

Biden has now succesfully secured the endorsement of key figures across the Democratic Party, including more progressive candidates in Bernie Sanders and Elizabeth Warren, as well as former President Barack Obama. The path ahead will be challenging, particularly in an environment of social distancing, which is set to persist in some form throughout the campaign and will likely make rallies or large political gatherings impossible. Biden will instead have to rely on media, television and social media, much of which requires a very large budget. Differences in public appearances of both candidates have already been stark. While President Trump has spoken on a near daily basis at widely-covered press conferences, Biden has been forced to kick off his campaign largely via social media and through a podcast series recorded from his basement at home in Delaware. It remains to be seen which approach will be more effective, mainly based on how public perceptions of the current administration’s handling of the virus evolve.

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 have exited the race, so have their policies. Since becoming the clear 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, will get 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. If successful in November, it remains unclear at this stage whether the Democrats would proceed in raising taxes, in part given the uncertain path ahead for the US economy.

Investors will also be watching for a clearer steer on Biden’s proposed approach to China. Recent surveys have confirmed a hardening of views on China across both Republican and Democrat voters this year (see Exhibit 5), and Biden’s campaign team has so far been keen to emphasise their candidate’s tough-on-China credentials.

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 3-29 March 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 almost certainly be attributable to Covid-19, not the political campaigns quietly existing alongside it. While the election is still many months away, there are three areas of focus that could materially impact investor sentiment when the market’s attention does inevitably shift to politics.

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 now 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. Actions from either country that ratchet up tensions further ahead of the November election are a clear catalyst for market volatility. While so far it has been a Republican administration in charge of the negotiations, further information from the Democrats about how they would propose to manage this relationship may also impact market sentiment.

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 combination of policies employed by the next administration will be an important factor in determining whether the US stock market’s leadership over much of the past decade will continue. An environment of escalating trade tensions has favoured the higher-quality US stock market relative to other regions historically, although we recognise that an increase in regulatory pressure on the tech titans could pose risks to US market leadership given the high weights to technology and communication services sectors in US indices. We will be tracking developments closely as 3 November approaches.

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. Realised volatility is the 52-week standard deviation of price returns. Data as of 31 May 2020. Past performance is not a reliable indicator of current and future results.