US Election 2020

America decides

It’s going to be a bumpy ride for markets ahead of 3 November - and possibly beyond if an election result is delayed or contested.

Biden gained a significant lead in polling as voters expressed disappointment with both Trump’s pandemic handling and response to BLM protests and civil unrest, but 2016 taught us anything can happen despite what pollsters say.

The polling gap between Trump and Biden is starting to narrow, and despite the president’s poor approval rating, he does an edge on one thing: the economy. As the country reopens and US economic data improves, Trump has a chance yet to win over voters.

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When is the US election?

The election will be held on Tuesday 3 November and it’s a race between Republican incumbent Donald Trump and Democratic nominee former Vice President Joe Biden.

If one candidate has a clear win, markets will price in the news accordingly and look to the future. But if the results are close, and if a surge in mail-in ballots causes delays, we may see a contested election - and heightened market volatility - until Congress ratifies the result on 6 January ahead of inauguration on 20 January.

As we draw ever closer to the US election on 3 November, it can be advantageous for traders to understand expectations for the respective battles for the White House, House, and Senate.

This can help with one’s strategy and making informed decisions around what markets to trade given the respective parties policy objectives, and how they could shape economics, regulations, and the corporate landscape. It could also help with the ability to price risk and to understand if the election has a heightened risk of being a volatility event where there could be opportunity.

To achieve this, we have firstly used multiple political forecasting models, where the methodology varies, but typically involves the use of Monte Carlo simulations to predict an outcome. We also use the RealClear Politics average of the national polls, which adopts a more traditional method, where an organisation would call a sample of individuals from various demographics. And we use two betting sites to see how the public are seeing the probabilities of the outcomes.

Of course, no one has a crystal ball, and many will point to the ineffectiveness of polling in 2016. However, there may be stark differences this time around. Either way, if financial markets are responding to the perception of the election, this election matrix can give a multi-faceted view on how the broader public see the outcomes unfolding.

Please note: we don't take a political view. These variables haven't been selected to skew the bias.

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Two major themes: China and Taxes

China

On China policy, both candidates are a bearish case for markets as the US-China relationship will remain fragile. Markets have learned to expect a hard stance on China from the Trump administration, yet once seen as an easier ticket for China, Biden has certainly adopted a harder position over time. A Biden administration would be less likely to use tariffs as punishment, which could be positive for the USD and US stocks.

Taxes

Trump famously slashed the corporate tax rate from 35% to 21% in 2017. The pro-business policy was well-received by investors and helped propel US stocks to endless record highs, maintaining a strong US dollar until the pandemic. Biden has indicated a partial reversal of the 2017 corporate tax rate, perhaps towards 28%, but It is unclear when such a change would be made, as higher taxes could be a handbrake on a recovering economy.

But it's not winner takes all

The winner of the US election isn’t decided by the popular vote, instead it’s decided by an electoral college system. Under the electoral college, many states will always vote blue or red. For example, California will always vote blue and Oklahoma red. This makes battleground states so important, as they ultimately determine the election outcome.

Florida is a critical battleground state. It has the third largest number of electoral college votes and has voted for the overall election winner all but once since 1964. Trump won Florida in 2016, but current polls indicate the state could tilt blue this year.

Many swing states are part of the industrial mid-Western rust belt, which Trump overwhelmingly won in 2016. Wisconsin, Michigan, and Pennsylvania will be among the most critical swing states this year.