US Election 2020: Eyes on the US Senate

The Political Event of the Year 2020

The most-awaited political event of the year 2020 is just around the corner: the US Presidential elections will take place next Tuesday on the 3rd of November. The US politics have the potential to affect the global economy, alliances and trade agreements which makes it a Global Event.

In a pandemic-induced environment, the stakes are also higher for this election because markets are not only concerned on the next President but are more interested in knowing which party will hold a majority in the Senate and the House of Representatives.

Battle for the US Senate  

Investors will hold more importance to which party takes control of the US Senate as it is tied with the ability to pass legislation related to healthcare, climate change, payroll taxes, and immigration, among others.

The Legislative Branch

The Legislative Branch consists of the House of Representatives and the Senate, which together form the United States Congress.

House of Representatives: The Presiding officer is the Speaker of the House and is elected by the House of Representatives. The Democratic Party currently hold the majority and Democrat Nancy Pelosi is the Speaker of the House. As per polls and analysts, the Democrats’ control of the House is almost certainly safe.

Democratic (54%) v/s Republicans (45.8%)

Senate: The Vice President of the United States serves as President of the Senate and may cast the decisive vote in the event of a tie in the Senate. The Republican Party currently holds the majority in the Senate. The main question for markets is whether there might be a clean Democratic sweep.

Democratic (47% including 2 independents) v/s Republicans (53%)

The Political Gridlock

The US is stuck with a gridlocked Congress which is not unusual but this time, the stalemate is halting relief legislation which the US economy desperately needs during this pandemic. The gridlock is failing the US population in times of need.

COVID-19 has changed the odds of the election. 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 to the deepest levels in decades due to the various forms of lockdown amid the pandemic and unemployment soared to the worst levels. As the pandemic continues to wreak havoc across the globe – the US recorded more than 9 million coronavirus cases and above 230,000 deaths.

The second coronavirus relief package has become the focal point for markets in this 2020 election.

Republicans and Democrats: Policies and Markets

Generally, 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. Yet, even though a Democratic win means higher taxes which will negatively affect corporate valuation and the stock market, historical performance has shown 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.

The 2020 US election is revolving more towards the focus for stimulus – investors will mostly be looking at:

• The composition of the House and Senate
• A potential for contested results
• A delay in calling the election due to a substantial increase in mail-in/absentee balloting

Volatility

Just days ahead of the crucial presidential election and surging coronavirus cases in the US and Europe, volatility soared to the highest level mid-June. The CBOE Volatility Index which is a real-time market index providing a measure of market risk and investors’ sentiment rose above 40 earlier this week.

Volatility tends to increase close to election day and then is likely to calm down after. However, the election in itself is not only the main contributing factor of volatility. The need for “timely” stimulus relief as the pandemic is raging through the US is of utmost importance. Additionally, we expect the daily records of coronavirus cases in Europe and the expectations of more national lockdowns to keep volatility elevated in the next couple of weeks.

Investment Opportunities?

Major equity benchmarks saw major pullback this week. The S&P500 is on course for its biggest-ever loss in the week before a US presidential election.

As of writing, US stocks rebounded slightly on the back of improved economic data, big tech earnings results and some buy-the-dip strategies. While volatility might be unsettling and especially given the current uncertainties, investment opportunities may still arise if investors look beyond the near-term risks.

In a pandemic-induced environment, the elections noises will eventually fade. Investors should concentrate on the fundamentals – the diverging fiscal policies if there is a Biden or Trump Administration, the gradual economic recovery path following the pandemic, and the liquidity coming from the central banks.