02 Nov 2020
The upcoming US election is being closely followed by people around the world. Rarely have we ever seen such a polarised electorate. Unlike most elections of the past, this election is more a referendum on Trump rather than the usual battle between Republican and Democrat ideologies.
While the Presidential race is the focus of attention, for markets the real story is who wins what.
A big win for either side is expected to much more positive for markets initially than a close call. Everyone is waiting for the next stimulus package to be passed. Since the midterm elections, the Democrats have held Congress, while the Republicans control the Senate. Before the mid terms the Republicans controlled both and that is when they pushed through their major policies such as the tax cuts.
As we know in Australia, it is hard to get major changes through without control of both houses of parliament. You need to win the support of the cross benchers.
Of the 100 seats in the US Senate, only 35 are up for grabs. The Republicans hold 53 seats and of the 35 Senate elections three, 23 have Republican incumbents, 12 have Democrats. So the Democrats would have to hold the 12 seats they have for re-election and gain three more and win the White House, to get control of the Senate (if it is 50/50 the Vice President gets the casting vote).
In Australia senators vote according to party lines and you must win the support of the smaller parties to get legislation through the Senate. In the US there are two parties, but not all Senators vote along party lines. If you do not control the Senate, you look to get the support of the more central members of the other party.
It is much more difficult to get policy through if you do not control the Congress and the Senate. Despite the strong views surrounding this election, the reality is that it is hard to do much in terms of policy, without control.
Ironically, many investors on Wall Street believe a so-called "blue wave" of Democrats in the White House, House of Representatives and Senate will be the most positive for stock markets - at least in the short term.
That's despite Biden and Democrats pledging to increase the corporate tax rate from 21 per cent to 28 per cent, hike taxes on the wealthy and impose new-climate related regulations on oil and gas.
Investors are very focused on a potential multi-trillion dollar COVID-19 fiscal stimulus on infrastructure and other job-recovery programs that could pass the Senate if Democrats record a clean sweep.
If the Republicans control it all, we will get a stimulus, but expect it to be smaller than the Democrats.
If the Republicans retain the Senate, Biden could face an uncompromising Republican Senate unwilling to bend to the Democrats' big taxing and spending plans. If there is a stalemate for a period if the election is contested that would be a serious concern. This is the worst near term scenario for markets.
However, it would most likely mean that the corporate tax cuts will not be rolled back. When you have different control of the houses or even very close numbers, it is often the moderates on either side that make the major decisions. You will never get the votes of those at the extremes of either party. You have to work with those closest to the middle. If action is too extreme, Senators could vote against their own party’s legislation (they normally find out in advance and would not put it to a vote until they had negotiated further to get them on-side).
So, in the medium term and Biden win, with a Republican Senate may be best for markets.
It does not look like we will be able to have anyone in the office before Christmas, which is sad.
Good luck if having a bet on the Cup
As always happy to talk if there is anything you want to go through.