Life Imitating Art

John Leiper – Chief Investment Officer – 6th October 2020

Saturday Night Live has a reputation for expertly parodying presidential election debates. My all-time favourite is Al Gore (Darrell Hammond) versus George Bush (Will Ferrell) and this year didn’t disappoint with expert performances from Donald Trump (Alec Baldwin) and Joe Biden (Jim Carrey).

In a case of life imitating art, the ‘debate’ was anything but, with Chris Wallace failing to moderate a chaotic and toxic shouting match between two men that should have known better. If I had to draw one conclusion from the debate it would be that Biden performed much better than expected. Betting odds for a Biden win improved considerably after the debate and a new Wall Street Journal/NBC News survey, which was conducted in the two days following the debate, put Biden’s lead at 14 points. That’s up from 8 points in September and a prior 11-point high in July.

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At the end of the week, we received the shocking news that President Trump had tested positive for the coronavirus. The initial reaction was negative and the market now awaits the answers to a number of questions including how the virus will affect the president, his political allies (and opponents – Biden shared a stage with Trump), the economy and the election. Trump contracting COVID-19 is unlikely to affect whether someone upgrades to a new iPhone but his diagnosis could impact public perception, particularly amongst those who may have considered the pandemic a hoax, to the detriment of any ongoing relaxation of lockdown provisions. This may well have been the case in the UK with Boris Johnson’s hospitalisation contributing towards increasingly conservative behaviour and therefore a greater economic hit relative to neighbouring countries. Further, when Johnson contracted COVID-19 it led to a temporary wave of sympathy across the country (although this has long since been exhausted). In contrast, Trump is going out of his way to demonstrate that he remains in good health which is unlikely to produce a wave of public support. Notably, a Reuters/Ipsos poll released on Sunday shows most Americans thought Trump could have avoided the infection if he had taken the virus more seriously. So, no sympathy boost and to top it off the diagnosis will also prevent him from attending rallies, which could prove a disadvantage for an incumbent trailing in the polls.

However events transpire, we see four potential outcomes from the US presidential election:

  • Disputed or questionable election result
  • Trump wins
  • Biden wins and Republicans hold Senate
  • Biden win and Democrats achieve clean sweep across both chambers of Congress

Trump has repeatedly claimed that mail-in ballots are susceptible to voter fraud and that he may refuse to accept the election result should he lose. That sounds dramatic, but to concede an election is more an act of tradition, born out of statesperson like conduct, than an obligation. We think this outcome is highly unlikely, but if it does happen, it is reassuring to know there are clear laws in place that dictate both the process and timeline for dispute resolution. The United States is a developed market country with rigorous institutions designed to ensure the peaceful transfer of power. In the past they have handled assassinations, impeachment, resignations and violent riots so Trump refusing to concede is not an outlier. The constitution states that a new President must be inaugurated by the 20th January, so in the worst-case scenario we could be in for a month or two of elevated uncertainty. That’s not ideal but the long-term consequences to the economy, and markets, will be minor. As a short-term guide, we can look to the 2000 George Bush/Al Gore election recount which saw safe-haven assets rally, such as Gold and Treasuries, whilst risk assets sold-off.

 

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No eventual winner of the US presidential election has gone into, and come out of, the first debate trailing their main rival by as much as Trump does right now. That said, there is a big difference between the popular vote and the Electoral College, as Hilary Clinton found to her disadvantage in 2016 so a Trump win remains on the cards. It all comes down to a few key states including Florida, Texas, Ohio and Iowa. The odds are not in Trump’s favour, but the polling differentials are not far off the margin of error. If Trump does win, we see that as a continuation of the status quo although there could be a notable impact on healthcare stocks. This follows Trump’s nomination of Amy Coney Barrett to replace Supreme Court Justice Ruth Bader Ginsburg. If confirmed she could be the deciding vote in a landmark legal challenge which seeks to strike down the Affordable Care Act, which has been beneficial to the sector’s business model.

Should the Democrats achieve a clean sweep, which includes the White House and both chambers of Congress, the most likely outcome is more taxes and regulation which could hit risk assets generally. However, a sizeable fiscal package focused on housing, social security and healthcare, and plans for an ambitious Green New Deal, will offset some of these concerns whilst directly benefiting certain subsectors of the economy such as infrastructure and renewable energy. Further, the Democrats can pre-empt the supreme court ruling, by taking the necessary steps to render the legal challenge invalid, benefiting healthcare stocks – whose future increasingly hangs in the balance. Sizeable fiscal spending will most likely steepen the yield curve, particularly in the short term. On trade, Biden will retain a strong stance against China, but it will be less antagonistic or unilateral in nature and likely result in lower tariffs and a more stable global trading environment which is US dollar bearish. This scenario lends itself towards opportunities in non-US risk assets, notably emerging markets.   

Finally, if Biden wins, but the Republicans retain the Senate we see that as something of a half-way house, moderately negative for the US dollar and somewhat positive risk assets, assuming additional stimulus, if required, is forthcoming and not subject to political gridlock.

The ACUMEN portfolios are positioned for a potential pick-up in volatility with a clear preference for quality assets. Meanwhile, our strategic market outlook is arguably more skewed towards a Biden clean sweep than the alternative scenarios, given our medium term forecast for a weaker US dollar, steeper yield curve and preference for ESG securities and emerging markets versus US equities. The election is held on the 3rd November and a lot can change between now and then. As such we continue to monitor the situation whilst maintaining a disciplined approach to risk management and portfolio construction.

This investment Blog is published and provided for informational purposes only. The information in the Blog constitutes the author’s own opinions. None of the information contained in the Blog constitutes a recommendation that any particular investment strategy is suitable for any specific person. Source of data: Bloomberg, Tavistock Wealth Limited unless otherwise stated.  

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