A view from the desk: US Election
“This process of election affords a moral certainty that the office of President will seldom fall to the lot of any man who is not in an eminent degree endowed with the requisite qualifications.” – Alexander Hamilton.
The shadow of the November 3rd US Presidential Election is now beginning to loom large. Whilst the views of political commentators across the pond might differ significantly on what issues will determine the result of the election, one thing that seems to be agreed upon is that this is the most consequential US election in our respective lifetimes. Despite (or because of?) the backdrop of the COVID-19 pandemic, it is likely to be the most anticipated and well watched global event for the rest of the year.
Ahead of the first televised Presidential debate on Tuesday (the 29th ....at 2am on the 30th in the UK if you are really keen for a front row view!) the last thing I intend doing is to wade into the murky waters of US politics. However, I do think that is important that we cast a vigilant eye across the pond as US politics decides the direction of the US economy which then feeds into global economics and stock markets. Simply put, due to the vast size of the US markets, the old adage remains true: “when America sneezes, we all catch a cold” although perhaps we should be looking for a new turn of phrase in a time characterised by a global pandemic.
My intention, therefore, is to offer a snapshot of the current consensus on the most likely outcome of the election; offer some thoughts on what we should be looking out for with regards to key events between now and 3rd November (and the immediate aftermath given President Trump’s comments just this week when he refused to commit himself to a peaceful handover of power if he loses: “We’re going to have to see what happens”!) and also reflect on what the implications of an incoming Democrat President might be for policy and markets.
So where is the election going based on polling? What are the key demographics and issues? What are the key things to watch for? Opinion polling seems to have got so much wrong in the past 4-5 years that at the outset a case could be made to cast doubt upon the accuracy of polling. However, the polling companies are convinced that they have learned the lessons of 2016 with regards to getting much better demographic representation within their sample groups. Indeed, if we cast our minds back to November 2016 the pollsters can point to the fact that they actually got the national popular vote correct as they had Hillary Clinton 2% ahead and she received 3 million more votes than Trump meaning that she won the popular vote 48.2% to 46.1%. However, this is not the same as getting into the White House due to America’s electoral college voting system. Mrs Clinton lost the election because she unexpectedly lost in the unforeseen “swing states” of Pennsylvania, Michigan and Wisconsin. The pollsters have held their hands up and admitted that they missed the trends amongst the non- university educated white voter in those states.
So, what do the current opinion polls look like? Joe Biden has won every major poll since March (bar one) and his average lead is between 6-8%. He will need to maintain this sort of lead too as the electoral college system provides an inherent advantage to the Republican Party as evident from the fact that only four Presidents have ever been elected despite losing the popular vote and all four of these were Republicans. Biden does, therefore, need to have a useful margin for error to be sure of victory but at 6-8% this will (should) be enough in the college voting system to make him President. If the lead were down to 3% then this could be quite different. The converse is true for Trump as it is impossible to win the electoral college if he remains 6% or so behind in the popular vote.
Biden’s lead is much narrower (by definition) within the “swing states” I mention above but is still enough to get him over the line. These 3 East coast states went to the Republican Party from the Democrats by the smallest of margins in 2016 (a combined 75,000 votes in aggregate is all that it took) and blue-collar America remains key. Biden is not making the same mistake as Clinton and taking them for granted and is currently ahead by c5% in these states. If Biden recovers these states and wins Arizona (where he is ahead in polls) then he will gain the necessary 270 votes to win. Biden is also polling just ahead in the 6 most "winnable" other marginal states.
Trump won the vote of suburban women in 2016 as they so clearly disliked Hillary Clinton. However, this time around women prefer Biden by 11% whilst men prefer Trump by 7%. It is also striking that Biden's approval ratings are well ahead of both Clinton and Trump at the same stage 4 years ago. The young vote is naturally more aligned with the Democrats but they did not vote in very large numbers four years ago as, they too, seemingly disliked Hilary. However, in mid-term elections in 2018 there was a highly motivated turnout of 18-39-year olds and with the increasing relevance to them of the Climate Change and Black Lives Matter agendas there is every likelihood that they will do so again.
Unsurprisingly, though, it is the over 65s that have highest rate of voting. They supported Trump en masse 4 years ago and according to the Pew think tank he won this group by more than 9%. A CNN poll this month, though, showed Biden leading the same demographic by 17 points reflecting the fact that the Democratic candidate enjoys large polling leads on the very prevalent issue of coronavirus.
However, the result is far from a “done deal” and the televised debates could still be key. Following next Tuesday there will be 2 more on 15th and 22nd October, together with a Vice-Presidential debate on 7th October. Given Joe Biden’s age at 77 there is a general presumption that should he win then his would be a one-term Presidency which means the performance of his Vice-President elect Kamala Harris (not that she would be guaranteed the role were Biden to win and then step down in 2024) takes on even more prescience in this.
The debates are likely to be a key catalyst in any significant rebound in the incumbent president’s popular vote. The contrast between the two men is likely to be striking. A recent article in The Times highlighted this. Wherever Biden goes (and his campaign team do now occasionally allow him outside his Delaware house) he is followed by large white circles. As Henry Zeffman wrote “these long loops of tape exemplify the difference between the Democratic candidate’s cautious return to the campaign trail and President Trump’s attempt to recover the raucous energy of his successful 2016 operation. These circles are used to distance and enclose the small pack of journalists allowed into Mr Biden’s events.”
Whilst both men are holding many more events than usual in more COVID aware outside settings, Biden can often seem isolated and downbeat against a president who revels in the embrace of large crowds, present as if the pandemic never happened. Four years ago, Trump thrived on running as an outsider and is trying to take that approach again, but it disconnects with many of the public as he cannot easily position himself like that now. However, it is tough to be on stage in the debates for over an hour and Biden is known for an ability to "drift" when not scripted. If he does badly in 2 or more of the debates, then this could be key to any Trump resurgence. Zeffman also suggests “a plausible path to victory (for Trump) seems to run through exploiting his enthusiasm advantage. According to a poll 60% of his voters are very enthusiastic about backing him, compared with 51% for Mr Biden. Caution over the virus at his rallies might not be worth dampening the excitement among his grassroots”.
Trump will likely speak about the greatest economy in US history before coronavirus hit, about the strength of stock markets and his determination to improve law and order. Biden will focus on restoring the glory of the nation and very much aim to position himself as the Main Street candidate against Park Avenue and Wall Street for the President. Surveys consistently suggest that Americans are worried about their health and jobs and not things like Middle Eastern peace. US voters are domestically focused. US-China trade talks seem to have slipped off the electioneering radar but when it does appear both candidates are trying to talk tough on China. However, it is reasonably certain that Trump will not jeopardise the Phase One deal he has in place as this would hurt him in these swing states. US- China relations are at a precarious point, but the American people really care little for international relations.
When Bill Clinton’s strategist James Carville coined the phrase “The economy, stupid” in 1992 he was striking at the heart of US politics, and the bottom line is that a full economic recovery in the US is still several years away. The surge in growth we have witnessed in the third quarter is largely related to many businesses going from a total lockdown to a new COVID-19 normal. This suggests that although growth should continue after the third quarter, it is not going to be nearly as fast. You can only re-open your business once, not again and again (unless lockdowns happen again, which would send the economy back into negative territory).
However, the economic argument is not just about growth and unemployment, it is also about issues of inequality. The top 1% of income earners have done very well over the past four years and their after-tax incomes have seen a sharp upward movement since 2016. The robust pre-coronavirus economy had also created gains lower down the income chain but “a much less remarkable increase” as Invesco’s Paul Jackson has described it. Therefore, the level of inequality has risen which seems to suggest that Trump might struggle to maintain the lower economic class voters that he played to in 2016.
The President is exerting significant pressure on US pharmaceutical companies to develop a successful vaccine by 1st November as he remains determined to announce a “cure” as he puts it pre-election, as an apparent panacea for his polling woes. Consequently, there are real tensions between the government and the CDC (Centre for Disease Control & Prevention). However, by overtly politicising this issue he might well be undermining his own campaign.
Talking of “tension”, if Trump does not “like” the result is there a genuine chance that he will he refuse to step down? If it is extremely close and both candidates have a claim to victory in key states it is conceivable that Trump will contest the results and take it to the Supreme Court – hence his determination to fill the 9th spot vacated by Ruth Bader Ginsburg’s untimely passing. His rhetoric that greater use of mail-in ballots this time around would lead to the “most corrupt election ever” is baseless but if you keep saying something often enough then people can start to believe it!
The reality is that the system is very secure. Some states have already started voting and whilst it will not jeopardise the results of the election, "mail-in" voting may delay the results. Many states do not open and count these votes until Election Day itself and these are then processed with additional safety checks e.g. verifying signatures etc. What might be significant for those seeking a smooth transition of power should Joe Biden win, is that some of the key states like Wisconsin and Michigan will only start counting them on 3rd November. As Republicans tend to vote in person and Democrats are more likely to use postal ballots, we could easily have a situation where exit polls give a state to Trump and he declares victory but then a few days later the postal ballots give that state to Biden.......It is telling that both campaigns have put $20m aside to mobilise legal teams for immediate post-election result legal challenges.
If it comes to a 2000 style stand-off where it took over a month of legal battles to decide the result of the Florida “re- count” 5-4 in the Supreme Court, there has to be a fear that we could see significant civil unrest related to this given the currently flammable nature of sentiment in many US cities already. The S&P 500 Index also fell by 8% during those six weeks. However, if the current opinion polls are proved correct then Joe Biden's win should be significant enough that apart from a few grumbles and tweets President Trump will move out in January 2021. What, then, might a Biden presidency look like?
Perhaps counter-intuitively, history tells us going back to 1853 (and I take this as starting point as since then there have only ever been Republican or Democratic presidents) that it is Democratic presidents that have been associated with bigger average annualised stock gains (5.2% v 3.5%). As an aside, there is also a similar effect under socialist presidents in France too.....
Biden sat very much in the middle of the Democrat candidates when it came to proposed policies. Corporation tax will likely rise to 28%; there will an increase in top rates of income tax (39.6% v 37%), and a doubling of the minimum wage. He is planning a huge infrastructure package made up of technology (where he has not proposed the break- up of “big tech” that Bernie Sanders and Elizabeth Warren are championing) and renewables. On energy he will reverse nearly all the environmental regulations Trump has put in place to take away President Obama’s reforms and look much more favourably upon the “Green New Deal”.
He has a public healthcare option via planned improvements to the Affordable Care Act and is keen on bringing down drug prices, but it is not a full Medicare package. However, healthcare providers could still be an interesting area for investment under this scenario. Basic consumer stocks could be another stock market play as doubling the minimum wage will put more spending power in the hands of those on lower incomes where there is a higher marginal propensity to consume. There has also been a very robust rebound in housebuilding activity (and it is the same in the UK by the way) and if Biden is elected the construction sector more broadly might be a key beneficiary. However, it is self-evident that coronavirus has created a huge fiscal gap that will need filling whoever is President, and this is likely to dampen the sort of spending boost that Biden is promoting. The limited room for fiscal manoeuvre probably means that it is not that important who wins from an economic and market perspective.
With regards to foreign policy, Biden will work to re-build US international relations. Whilst Trump sees the European Union as a competitor, Biden does not and the Democrats greater focus on employment and environmental issues brings them much closer to European standards. He is also a long-term supporter of NATO. America will become more engaged in the world again.
And what about the impact on the UK? There is now no chance of a US-UK free trade agreement this year and as neither side want mini deals it is likely (assuming Trump loses) that trade talks will stall for a while. Our government will get a UK-US Free trade agreement in place, but it is suggested that this is most likely in early 2022 (although this could be further hastened should the UK and the EU reach a deal). Biden will be extremely interested in rebuilding the Trans-Pacific and US-European trade agreements, but this can be done in parallel with a UK deal. There is little evidence that Biden is "anti" UK as some opponents have suggested and he has no real reason to be punitive towards us.
The 2020 US Presidential Election is proving to be one of the most emotive on record and, to be fair, it is hardly surprising given the emotions the current incumbent stirs - both for and against him. It intrigues me that all around the world people are very quick to vocalise who Americans should vote for in a way we would despise if those same Americans were vociferously telling us who we should elect! However, in my preparatory reading ahead of penning this piece, the words of one American have stayed with me. They are the words of Ben Wallis, a 38-year old former bartender (the bar has been closed by coronavirus) in Michigan, quoted in The Times on 19th September: -
“I only voted Trump because I could never bring myself to vote for Hillary Clinton. I figured, what the hell, might as well give him a try. He’s not going to burn the country down. And now the country’s on fire”.
Graham Withers – Head of Discretionary Investment Management September 25th 2020