News & Analysis

US Elections: COVID-19, Policies and Markets

August 14, 2020

By Deepta Bolaky
 @DeeptaGOMarkets

The Political Event of the Year 2020

The most-waited political event of the year is fast approaching: the US elections will take place on the 3rd of November. The nominees of the two main political parties – Republican and Democratic party are yet to be announced at the Presidential Nominating Convention. However, the clear frontrunners are President Trump and Joe Biden. Without any doubt, this election will be widely monitored as US politics may affect the global economy, alliances and trade agreements.

Markets were rattled by the long-drawn trade war between the world’s two powerful economies. Even though we kick-started 2020 with positive trade negotiations, the tussle between the US and China over the transparency of the coronavirus outbreak worsen the already fragile relationship. Ahead of the Presidential election, investors are bracing for the tensions between the US and China to get worse as it is a politically-motivated move by President Trump to win another term. Rightly so, the recent new tech war between the two countries are keeping the markets on edge.

The COVID-19 Effect

In modern times, history has shown that an incumbent President has a clear advantage and usually wins re-election. The last president to lose re-election was George W Bush which was mostly due to an economic recession. Therefore, in recent history, an incumbent President has never failed to win a second term unless a recession has occurred during their time as president. At the beginning of the year, the odds of President Trump winning the election was high.

US-China Tensions & COVID-19

The Trump administration had a tough stance against China which had bode well with a majority of Americans. As per Pew Research Center:

  • 73% of US Adults say they have an unfavourable view of China.

  • Around two-thirds of Americans (64%) say China has done a bad job dealing with the coronavirus outbreak.
  • Around three-quarters (78%) place a great deal or fair amount of the blame for the global spread of the coronavirus on the Chinese government’s initial handling of the COVID-19 outbreak in Wuhan.

However, as the virus continues to spread across the globe, the US recorded around 5.3 million of coronavirus cases with more than 165,000 deaths. The US was hit the hardest by the pandemic and the handling of the outbreak by the Trump administration was questioned. The President has failed to timely respond to the crisis, is also being blamed for sidelining the advice of the experts and played down the severity of the coronavirus crisis.

Strong US economy

Heading into the election year, the US President was confident that its hard stance on China and a thriving US economy with a historically strong labour market and greater economic security will be the focal points of his election campaign. However, the US economy contracted due to the various forms of lockdown amid the pandemic. The preliminary Q2 GDP figures show that the US is poised to shrink by a 32.9% – the deepest decline in decades. The pandemic continues to wreak havoc across the globe and the outlook for the third quarter remains murky.

COVID-19 Changed the Odds

As per the latest polls, the odds have changed – the battleground states look good for Joe Biden. The presumptive Democratic nominee even has big leads over states like Michigan, Pennsylvania and Wisconsin where the Republicans won by margins of less than 1% in the last election:

The most recent data suggest that even Republicans supporters are questioning its response to the coronavirus pandemic. COVID-19 is unlikely to fade away by the election date and combined with the uncertainty about the state of the US economy – the current polls show that Joe Biden is running well ahead of President Trump.

Republicans and Democrats: Policies and Markets

Under any presidential campaign, tax policies are the primary factor for the markets because of its direct impact on corporate valuation. The Republicans are supposedly considered as more “market-friendly” compared to Democrats.

Cutting Taxes vs Raising Taxes

In simpler words, the Republicans encourage tax cuts and believe in an income tax system that does not unfairly target those who create jobs and wealth while Democrats support a more progressive tax structure to provide more services and reduce economic inequality by making sure that the wealthiest Americans pay the highest amount in taxes. After the 2016 election, markets rallied on the assumption of promises of tax cuts and faster economic growth. However, the trade war has created an uncertain environment for investors and the economy did not progress in the way expected.

For Joe Biden to see through this agenda, he plans to make new, bold investments and speed up the timetable for many of the 10-year investments he has already announced.  He will pay for the ongoing costs of the plan by reversing some of Trump’s tax cuts for corporations and imposing common-sense tax reforms that finally make sure the wealthiest Americans pay their fair share.

Stock Market Performance by President

The below interactive chart shows the percentage gain in the Dow Jones Industrial Average by Presidential term. Despite the pro-business policies, the Dow performed better under Barack Obama over the same time frame as compared to President Trump. Generally, a Democratic win means higher taxes which will negatively affect corporate valuation and the stock market. However, we have seen that there are higher market returns under Democrats as both the combination of higher taxes and government spending stimulate the economy and support the markets.


Source: MacroTrends

The Need for More Fiscal Stimulus

In a pandemic-induced environment, markets are in a need of more fiscal support from the government. The Fed Chair Jerome Powell has also emphasised on the importance of fiscal stimulus to support the economy. The Democrats seem to be in favour of more government spending than the Republicans.

A Democratic Sweep – Bad for Markets?

Leading up to the election date, volatility may be high but markets will eventually adjust to either the Republicans or Democrats policy changes. Investment opportunities will arise irrespective of a Democratic or Republican win. Some investors may concentrate on certain industries or sectors that can be impacted as the opposing views of both parties on renewable energy, climate, trade policies and health care could affect stocks related to those industries.  But most importantly, this election will be geared towards finding a government that will fight the pandemic more effectively and also eased trade tensions with key allies.

A democratic sweep may not be as disastrous as investors fret as historically stocks did also well under the Democrats and in some cases even better than under the Republicans.

By Deepta Bolaky
 @DeeptaGOMarkets


Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice. 

Next:
Previous:

Ready to give it a GO?

By Deepta Bolaky
 @DeeptaGOMarket

EU Recovery Fund

After a standoff between the EU and Germany, following a critical ruling on ECB’s quantitative easing program by Germany’s constitutional court, the gradual reopening of economies of member states within the Eurozone has brought some optimism.

The downside risks for the Eurozone and its shared currency have somewhat eased on the fact that Europe, which was the epicentre of COVID-19 after China, might have gone through the worst phase of the pandemic. The sentiment for the Euro was also buoyed by the EU Recovery fund proposed by Chancellor Angela Merkel and President Emmanuel Macron to help Europe’s mostly hit countries.

Unfortunately, the optimism over the coronavirus fund proposal, which aims to show unity in overcoming the crisis and to achieve quicker economic recovery, was short-lived.

Europe’s Frugal Four 

Amid an unprecedented crisis, the Franco-German proposal was to provide support and reinforce EU financial relations and show that Europe is standing together. Austria, Denmark, the Netherlands and Sweden, dumbed as the “frugal four” put forward a counter-proposal that highlights the diversion of opinions in helping the Southern members states.

Grants or Loans

The Franco-German proposal is about “overcoming the crisis united and emerging from it stronger”. Both leaders proposed to make outright grants to help countries in need. They want to launch a temporary fund of 500 billion euro for EU budget expenditure:

“This would not provide loans, but rather budget funding for the sectors and regions hit hardest by the crisis. We firmly believe that it is both justified and necessary to now provide funding for this from the European side that we will gradually deploy across several European budgets in the future.”

In contrast, the frugal four wishes to provide loans rather than grants to southern European countries and expect the recipients of loans to comply with the fundamental principles of the EU and commit to strong reforms in repaying the loans. Their two-year and “one-off” proposal appears to also outline how those countries should use the funds and target sectors that are mostly hit based on an assessment.

The coronavirus pandemic is testing the solidarity of European members and is threatening to reawaken a euro crisis. Southern countries like Greece, Italy and Spain lacked the fiscal space they need to put forward an economic stimulus package to support their economies, compared to Northern countries. 

Disparity? Compromise?

Both proposals are saying “yes” to emergency aids to assist with recovery, but the disparity lies on how the funds will be financed to respond to the economic wreckage. The size of the emergency fund, the conditions of the funds or whether it will be grants or loans will be a compromise the markets are expecting to see. However, the type of compromise might be a key factor in determining the relationships of EU members.

Unprecedented times probably need unprecedented Unity.

Euro – The Shared Currency

The fact that Europe may have gone through the worst phase of the coronavirus has somewhat eased the downside risks of the shared currency. But the current geopolitical tensions with China and uncertainties on the EU Recovery plan are putting a lid on the upside momentum of the Euro.

After the sharp plunge in March, the EURUSD pair has been trading within the 1.08 to 1.09 range. Yesterday, the better-than-expected IFO Surveys in Germany has helped the pair to hold ground and hover around the 1.09 level. The recovery plan could mitigate the selling pressure and allow a probable move above 1.10 level if there is a compromise that satisfies the frugal four.

EURUSD

Source: Bloomberg Terminal

The immediate attention turns to the European Commission which is supposed to unveil a draft recovery plan on May 27th, 2020.

By Deepta Bolaky
 @DeeptaGOMarkets

Disclaimer: Articles and videos from GO Markets analysts are based on their independent analysis. Views expressed are of their own and of a ‘general’ nature. Advice (if any) are not based on the reader’s personal objectives, financial situation or needs.  Readers should, therefore, consider how appropriate the advice (if any) is to their objectives, financial situation and needs, before acting on the advice.

About GO Markets

GO Markets was established in Australia in 2006 as a provider of online CFD trading services. For over a decade, we have positioned ourselves as a firmly trusted and leading global regulated CFD provider. Traders can access more than 60 tradeable CFD instruments including Forex, Shares, Indices and Commodities.