With the Democratic convention behind us, the Republican convention this week, and Election Day only 10 weeks away, we thought it was time to take a closer look at the potential market impact of the election. Now that former Vice President Joe Biden has been formally nominated, we’ll look at the potential market impact of a Biden presidency this week. Next week, after the conclusion of the Republican convention, we’ll look at the potential impact of a second term for President Donald Trump.
Here’s how we’re going to go about it. First, as always, our concern is strictly the market impact of either party winning the White House, with the economy a secondary concern, since that feeds into market impact. But our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets. Second, each of these election previews, while grounded in the facts, will focus on the upside of each candidate, while also touching on potential concerns. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside, if that’s the best case) on the table.
Early Data Favors Biden, But We Would Still Call It A Coin Toss
We believe the best way to approach the election at this point is to consider it a coin toss. The margin of victory in the popular vote has been under 5% in four of the last five elections, and in two of those elections the outcome in the Electoral College differed from the popular vote. That’s not meant to criticize the Electoral College—it just highlights how close our elections have become. A 5% difference is small enough that an election can easily swing one way or the other based on what happens in the months and weeks before the election—and there are scenarios in which even a 5% difference in the popular vote could mean a different outcome in the Electoral College.
Some of the major factors potentially supporting each candidate, in our view, include:
• The power of incumbency favors Trump. (Presidential incumbents win about 70% of the time.)
• Electoral College dynamics favor Trump.
• Enthusiasm toward one’s own candidate favors Trump, although the gap is narrowing.
• Polls currently favor Biden.
• The president’s approval rating favors Biden.
• The economy favors Biden, but circumstances are unusual.
• Enthusiasm to vote against the opposite party’s candidate favors Biden, but not surprisingly, that’s not necessarily a big driver of turnout.
We also follow market signals. We have often highlighted that S&P 500 Index performance in the three months leading up to the election has had predictive value for who wins the White House, whether it’s because it reflects the state of the economy or it signals the greater uncertainty that comes with a change in party. A positive market over that time period historically has signaled an increased likelihood that the incumbent party wins. The clock started ticking on that indicator August 3. So far the S&P 500 is up just a few percentage points, potentially favoring Trump, but volatility could quickly lead to a reversal.
Our friends at Strategas Research Partners have also put together a basket of stocks likely to benefit from a Trump or Biden presidency. Since early June, the Biden portfolio has been outperforming the Trump portfolio, though we acknowledge these stocks are driven by other factors as well.
The Senate also is being closely watched this election. If Trump wins reelection, the Republicans may very likely hold their Senate majority, currently at 53–47. With Democratic Senator Doug Jones from Alabama unlikely to hold on to his seat based on the latest polling data, Democrats would have to defeat a net of four Republican incumbents in addition to a Jones loss to take control of the Senate if Biden wins. (If the Senate vote is tied, the vice president breaks the tie.) We would put the likelihood of the Democrats taking the Senate if Biden wins the presidency at well over 50%.
A Democratic Senate on top of a Biden victory most likely would push Biden’s agenda to the left, but we believe that Democrats are unlikely to end the filibuster, and centrist Senate Democrats, such as West Virginia’s Joe Manchin and Arizona’s Kyrsten Sinema, would play a roll similar to the one played by Republican Senators Susan Collins, Lisa Murkowski, and John McCain when Republicans held both houses of Congress during the first two years of the Trump administration. Even with a Democratic Senate, there would still be checks and balances.