US elections and its impacts on financial markets

We are now less than 25 days aways from Nov 3rd the day of US elections. Experts predict the election would be bitterly fought with Joe Biden leading the polls over President Trump. The markets on the other hand are worried more about the decisiveness of the result than the result itself. An outcome which is contested in the courts is the worst for the markets. Adding to the uncertainty is the simultaneous race for the Senate, where Republicans currently have control, battling with the Democrats who now dominate the House.

The following are the possible outcomes post the elections. In each of the outcomes there would be a short and medium verses long term impact.

1.Joe Biden wins and Democrats control both Senate and House : A win for the Democrats along with the control in Senate and House may lead to a push towards greater regulation or anti trust measures along with increase in taxes for corporations. This would be a dampener for the markets with the technology and finance sector getting impacted the most. The former Vice President has also been critical of the traditional Energy sector and may bring in policies that increase regulation. This could be a boost to renewable energy players.

Short and Medium Term Impact: In such a scenario portfolio investors may start adding renewable company stocks in their portfolio and thus a promising outlook for electric vehicle manufacturers, renewable energy companies and clean tech solution providers. Thus a trend which favors a shift away from being overweight in tech, media and telecoms will clearly dominate the markets. This would also increase allocations to fixed income and may bring Gold into the limelight.

Long Term Impact: It very much depends on the policy actions but normally markets have the ability to adjust and go up in the long run.

2.Joe Biden wins but Republicans retain Senate and Democrats inHouse: In such a scenario the markets would not expect new legislation or overhaul of existing ones anytime soon. The bickering between the President and the senate would consume much of the time without achieving anything substantial.

Short and Medium Term Impact: This would mean a continuation of the status quo. Big Tech would continue to dominate the market in the absence of anti-trust legislation. Equities would continue the run if the Democrats push for a large stimulus package to get the economic back on track post the pandemic.

Long Term Impact: Democrats would try and push through some of their contentious campaign promises such as increase in corporate taxes. This would have negative impacts on the corporations and markets would not like it either.

3.Donald Trump wins and Democrats control both Senate and House: This would be policy paralysis scenario and would result in a political gridlock in Washington.

Short and Medium Term Impact: This would mean a continuation of the status quo. Legislative uncertainty would not affect the markets and in fact they would rejoice it. The lame duck presidency would have to spend most of their time to negotiate with the Congress on any proposed legislation.

Long Term Impact: It would very much depend on the mid-term elections in 2022. If Republicans win the house then things would move or else it may not. The markets would rise on other global cues and Fed policy actions in the interim period.

4.Donald Trump wins and Republicans retain the Senate and Democrats the House: This would lead to little change in the markets and it would start expecting additional stimulus package. Investors may term the second term of his presidency as pro business after the first term witnessed massive tax cuts for corporations and individuals.

Short and Medium Term Impact: This would mean a continuation of the status quo and markets would have no problem witnessing new record levels.

Long Term Impact: President Trump would like to live a legacy of business friendly and regulation unfriendly president. Markets would remain bullish in such a scenario

5.No clear winner and results challenged in court: A contested result would shake markets. The month long delay in getting the results in 2000 had resulted in the drop of S&P index by 4%. It is quite a possibility that the markets would behave in the same manner or even more volatile after the 2020 elections.

Short and Medium Term Impact: The markets may witness a big sell off in such a case. In this environment, Investors would expect gold and Treasuries to perform well.

Long Term Impact: Once the results are clear, markets would be again back in the bulls.

Conclusion:

Elections are eventful as they set the direction of policy but beyond that they would not drastically affect the market in the long run. A combination of factors such as the development of the vaccine, the return of consumer confidence and stimulus measures would play a big role in the recovery of the economy post the pandemic. Thus it would be better for investors to focus on the fundamentals of the economy rather than the outcome of the election results.