Today is election day – but will we know who is president by tomorrow?

Today is finally the last day of the US presidential campaign. However, Trump has already announced that tomorrow if there is no winner his lawyers are already ready to go to court. By law all votes which came by mail will not be counted out. Some states have already announced that it can take up to 2 weeks until all votes are counted. Given that more than 50% have voted via mail, we must expect that tomorrow there is a high likelihood that we have no clear winner. They latest poll says that there is a very important and close race in swing states. For instance, if Trump loses Texas and California, he will most likely not become president giveт the number of elector votes which would go to Biden. On the other hand, if he wins both states it will get a very close race due to the election system: simply put, the winner takes all votes.

Fig. 1: California and Texas have a huge impact on the outcome of the US election

It is important to know all 4 possible outcomes in which we can expect more fiscal stimulus. Short-term if we have fast and clear result it does not matter who wins. Mid-term however there are differences.

If Biden wins the country might cautiously reopen their economy and the US might replay its role in large international organization like for instance the WHO or the UN. There will be higher corporate taxes and a higher minimum wage which is mostly offset by the announced fiscal stimulus package. He will as well invest in renewable energy and try to establish a national health care system.

If Trump wins it will be a continuation of his erratic politics. He did not outline an agenda, but we must expect more trade tariff conflicts, more conflicts in international organizations and lower taxes. His other unfinished projects like the wall to Mexico, to end Obama care to lower taxes will be continued

But from a stock market perspective a democrat president is including all crisis better for the market, which comes as a surprise. Figure 4 shows that since the great depression (staring 1932) until today the market went up 14.7% p.a. under democrats and only 9.8% p.a. under republicans. If we adjust it and take out the dot.com bubble and the Watergate affair the result is the same. i.e. the market went roughly 15% per year up!

There are two major risks: In America, the 3rd Covid-19 wave could force more partial lockdowns and we will not have a president within the next days. Both could pull the markets further down. We are at critical technical levels in the US stock market and we have entered a bear market in Europe. Asia on the other hand is not only so far not having a 2nd corona wave they are also showing clear signs of a V-shape recovery. In Europe it looks rather for a W-shape recovery, while the jury is still out for the US. The latest ISM Industrial PMI still indicates a V-shape recovery, but the survey was done before the pickup of new Covid-19 cases.

Fig. 5: S&P 500 at critical levels: A further pullback after an unclear outcome of the US election cannot be rules out

The market expects a strong relieve rally with the next US fiscal package. However, if Biden wins his fiscal package might only be a reality in Q1 2021. To sum it up if we have a clear winner by tomorrow markets might go further up. But, if however there is an unclear outcome or Biden wins by a low margin we must expect a legal hick up over the coming weeks, which would definitely pull markets down.

Therefore, short-term the risks are elevated, mid-term into Q1 2021 we most likely will see higher prices. But with two elephants in the room (US election outcome and development of Covid-19 wave in the US) it might be prudent to keep some powder to try and to deploy money after we see more clarity in the election outcome. Having said that we expect that there will be no 2nd national lockdown in the US, but this is a key risk to our scenario.

Published: 03/11/20 by Blackfort CIO Dr. Andreas Bickel

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