Less
than a fortnight before the US election, a new paper from BNP Paribas Asset Management examines Joe Biden’s and Donald
Trump’s prospects of favourable White House – and Congress – outcomes. Because
without both the Senate and House of Representatives on their side, their
ability to deliver on their mandates will be severely hampered.
- Even though the pollsters make
Democrat Joe Biden the clear favourite, he also needs his party to turn a 47-53
lag in the Senate into a majority if he is to push through plans for fiscal
stimulus and tax increases to help fund bigger spending on infrastructure and
healthcare.
- Donald Trump needs to turn over
the Democrats’ large majority in the House of Representatives if he is to
deliver on his full programme. Otherwise, he will have to focus mainly on
foreign policy, trade and sector-specific deregulation in his second term.
- The Federal Open Market
Committee’s (FOMC) new policy framework means the monetary response to a major
fiscal stimulus will be much slower than it was after Trump’s tax cuts.
Biden may be favourite, but he needs the swing states
As is always the case under the US
electoral system, what counts most is the size of a candidate’s lead in the few
‘swing’ states most likely to decide the Electoral
College vote. This time around, these include Florida, Arizona,
Pennsylvania, Wisconsin and Michigan, and while Biden currently leads in these,
on polling day, anything can happen – as it did in 2016.
Little time left for Trump to turn it around
With the economy and COVID often cited as
the most important issues for voters, Trump’s dismissive approach to the
coronavirus may be costing him. In the wake of his own infection with the
virus, there has been little evidence of a new approach by the president to
change minds and win over undecided voters.
If Trump is re-elected, it’s most likely
to be because of a surprise event in the final campaign days, or that there is
a sizeable error in the opinion polls in the swing states, or a large number of
votes for Biden are ruled inadmissible.
Few policy hints for Trump’s second term
In 2020, Trump’s platform lacks much in the
way of defined policies or strategies. One topic mentioned repeatedly is
additional tax cuts, but the odds of pushing those through without the
Republicans regaining the House of Representatives – which looks highly unlikely
– seem very low.
Without support from both chambers of
Congress, a second term for Trump could look similar to the last two years; the
focus would be on foreign policy, trade and sector-specific deregulation. These
are all areas where the president and his Administration have considerable
latitude to manoeuvre without explicit permission of Congress.
Biden’s priorities
Biden’s policy agenda is broad, but at its
simplest, the most market-relevant parts can be boiled down to:
- A commitment to handle COVID
more seriously
- Emergency fiscal stimulus to
support those segments of business and society that have suffered in the
recession
- Redistribution via higher taxes
on businesses and richer individuals to help pay for better access to
healthcare
- Addressing the infrastructure
and climate change challenges the country faces.
Biden’s policies in these areas would see a
significant increase in the role of government in the economy.
One important policy area concerns the USD 2.4 trillion
fiscal stimulus package that House Democrats approved in October. Should
the Democrats gain the White House, the Senate and keep the House, fiscal
stimulus on that scale – at around 10% GDP – would lift growth, but also be
extremely expensive.
Control of the Senate is crucial
For many of the ambitious, potentially
market-moving, parts of Biden’s agenda to be delivered, Democrats will need to
take control of the Senate, where Republicans now have a majority of six. Only
a portion of Senate seats is up for election this year. While many of these
seats are considered extremely safe, around 10 of them will determine the
overall outcome – and the current polling in the Senate races is tighter than
in the Presidential contest.
The Federal Reserve’s likely reaction to fiscal stimulus
The expansionary fiscal policy that
followed Trump’s 2016 win was viewed as likely to push up inflation, an outcome
the Fed would typically seek to avoid by raising rates. This it did – raising
rates on three occasions in 2017, followed by four further moves in 2018. Even
so, core inflation only briefly reached 2% in 2018 before slipping back in
2019.
The central bank has drawn lessons from
that experience. Its thinking about the conduct of monetary policy has changed,
most recently in the new
strategic framework announced in August.
No longer will the Fed raise rates simply
in response to low unemployment or strong growth; it needs to be accompanied by
stronger inflation. Given
how flat the Phillips curve is thought to be, there is little immediate
prospect of fiscal stimulus stoking inflation.
Aggressive fiscal stimulus under a Biden administration combined with laissez-faire monetary policy should lead the US economy to outperform its counterparts elsewhere in the world for a time.
Read our full preview entitled 2020 US election preview: All or nothing?
Any
views expressed here are those of the author as of the date of publication, are
based on available information, and are subject to change without notice.
Individual portfolio management teams may hold different views and may take
different investment decisions for different clients. The views expressed in
this podcast do not in any way constitute investment advice.
The
value of investments and the income they generate may go down as well as up and
it is possible that investors will not recover their initial outlay. Past
performance is no guarantee for future returns.
Investing
in emerging markets, or specialised or restricted sectors is likely to be
subject to a higher-than-average volatility due to a high degree of
concentration, greater uncertainty because less information is available, there
is less liquidity or due to greater sensitivity to changes in market conditions
(social, political and economic conditions).
Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.
Writen by Investors' Corner Team. The post 2020 US election preview: All, or nothing? appeared first on Investors' Corner - The official blog of BNP Paribas Asset Management.
