Markets can get rocky leading up to any election, but tensions are running particularly high ahead of the presidential election in the U.S., where a polarized electorate, civil unrest and the ongoing Covid-19 pandemic have created a charged environment.
Peter Hardy, vice president and senior client portfolio manager with Kansas City, Mo.-based American Century Investment Services Inc., says “the divisiveness of this election, the uncertainty due to Covid and the rhetoric around election results from Trump can likely create continued market volatility beyond the [Nov. 3] election date.”
Hardy was speaking before the president tested positive for Covid-19, which has added another layer of uncertainty to the race.
With regard to policy, corporate tax levels are a significant topic of contention between Democratic candidate Joe Biden and Republican candidate Donald Trump, as are their stances on the environment and health care.
A report from Toronto-Dominion Bank’s economics department predicts that if Trump wins in November, “markets may expect to see policy lean toward greater tax cuts and more of the same policies from the past,” adding that such a result would offer “some comfort in the status quo for business and personal taxes.”
Corporate tax policy is likely to be the main market-mover following the election. In 2017, the Trump administration enacted the Tax Cuts and Jobs Act, cutting the corporate tax rate to 21% from 35%. If elected, Biden promises to raise the corporate tax rate to 28%.
Hardy points out that such tax increases tend to have a greater impact on small companies and technology firms.
To increase corporate taxes and implement other proposals, Biden would have to bring Congress on board, which could prove difficult if Republicans retain control of the Senate.
“The biggest factor that will influence whether [Biden] is able to implement any part of his platform with regard to taxes or spending is the makeup of Congress,” says Leslie Preston, senior economist with TD, since “the power of the purse lies with Congress.”
Another sector that could be impacted by a Biden win is health care. Biden is in favour of expanding the Affordable Care Act and lowering the eligibility age for Medicare to 60 from 65. Those changes would benefit health-care companies, Hardy says.
A Biden win also could mean renewed focus on the environment, which could help companies focused on clean technologies while creating headwinds for the energy sector. Limits on carbon emissions are a negative for energy companies, Hardy notes, while green-energy subsidies and green-behaviour tax credits would be a positive for companies creating clean technologies, such as electric cars.
The candidates’ immigration policies also could influence markets, particularly over the long term. Immigration levels have dropped during Trump’s presidency. This, Preston says, could constrain how quickly the U.S. economy can grow, given the country’s aging population. Biden’s platform is pro-immigration, which could offset the impact of proposed tax increases.
Should the election result in four more years of a Trump administration, markets will have some understanding of the status quo in terms of policies — but with Trump, nothing is certain.
“Trump’s policies can change overnight with a tweet,” Hardy says. “And so, with a Trump victory, there is continued potential for unexpected behaviours and volatility, which result in unexpected outcomes and market volatility.”
Another area of unpredictability is Trump’s trade relations with other countries. The president tends to act unilaterally on trade, instigating trade wars by slapping tariffs on other countries, including close allies such as Canada.
Biden has protectionist tendencies regarding trade too. His administration is expected to take a tough stance against China on issues such as intellectual property. A key difference between the candidates is that Biden promises to take a multilateral approach and work with other countries — a style that is likely to be more even-keeled and predictable for markets.
Another unknown in this election is whether the results will be accepted or lead to recounts and court battles. During the Sept. 29 presidential debate, Trump complained about mail-in ballots, claiming the election was “rigged.”
In 2000, Democratic presidential candidate Al Gore did not concede the election until Dec. 13 due to an ongoing recount in Florida. (The S&P 500 composite index dropped during that period. However, Preston notes, the weakening economy at the time could have accounted for that decline.)
Should the U.S. once again find itself in a situation in which the election results are contested, markets are likely to respond negatively. “[Recounts] traditionally [are] a recipe for financial market volatility,” Preston says.
However, such volatility would be short-term in nature, she says, while other concerns, such as the pandemic’s effects on the health of the population and the economy, are likely to have a more long-term influence on markets.
The Federal Reserve Board’s monetary policy also is likely to impact markets, Hardy says.
But what will U.S. monetary policy look like after the election?
The TD report notes that Biden supports an independent Fed and, as president, would not criticize the Fed publicly or nominate unconventional candidates for board positions. This is in stark contrast to Trump, who has repeatedly lambasted Fed chair Jerome Powell via Twitter and nominated questionable candidates — such as Judy Shelton, who openly questioned the need for the Fed’s independence — for board roles.
“At this point, [given] where we are in the economic and market cycle, monetary policy is probably a much more important component of asset evaluation than the U.S. election results,” Hardy says.