Of course, there are more investors who think Biden will win than there are those who think Trump will win. According to a Deutsche Bank poll from September, 40 per cent of investors thought Trump was either extremely or slightly likely to win, compared to 46 per cent for Biden.
The Citi poll gave similar results – 41 per cent versus 46 per cent - as did a Goldman Sachs poll. We expect this has risen in October, and so some of this risk will be in the price of financial assets already.
What is more, there has been no correlation between changes in Biden’s polling numbers and US equity market performance.
The first full week in October saw a big increase in Biden’s election odds/polling and a rising S&P 500 and Nasdaq.
Perhaps that is because past elections have had limited impact on the broad market.
Or because history is on the Democrat’s side in terms of the economy. Pre-eminent economists Nouriel Rubini and Alberto Alesina have shown that the Democrats tend to preside over faster growth, lower unemployment, and stronger stock markets than Republican presidents.
Recessions are almost invariably caused by imbalances built up by Republicans loosening regulations. Nothing destroys stock returns like a financial crisis.
But Biden’s agenda is more left-leaning than that of most Democratic presidents.
Perhaps the lack of correlation is because investors do not interpret Biden’s strengthening polling numbers as a proxy for the likelihood of the Democrats retaking the Senate.
It is easier for Biden to take the White House than it is for the Democrats to retake the Senate, due to the seats up for grabs this year (100 Senators serve six-year terms, with a third of seats up for election every two years). Assuming the Democrats lose Alabama (a very red state), they need to win back four other states.
However, Democratic challengers have started to poll increasingly well since early September.
Arizona and Colorado look highly likely to flip. North Carolina and Maine are leaning that way too, and it’s really close in Iowa and Montana. The election forecaster, ‘FiveThirtyEight’ believes the Democrats are “slightly favoured” to win the Senate, a significant change from mid-September when their simulations suggested it was too close to call.
Again, despite these large moves, US equity markets appeared unperturbed.
It is entirely possible, therefore, that the institutional investors surveyed are not representative, and that equity markets will not fall sharply on a Democratic clean sweep.
After all, what has been driving markets this year?
- The hope for a timely, effective vaccine;
- Supportive fiscal policy;
- Supportive monetary policy;
- A levelling-off of previously escalating Sino-US trade tensions.
Are any of those four pillars likely to be undermined by the clean sweep?
A President is unlikely to alter the outlook for a vaccine. Fiscal policy is likely to stay very loose under both Trump and Biden - its distribution will change materially, but not its scale.
