Historically, elections have had little effect on the markets over the long-term, and whatever impact they might have, it is always difficult to predict. While I write this, the votes are still being counted and in Mackenzie Investments Chief Economist Todd Mattina and Chief Fixed Income Strategist Dustin Reid’s opinion, there seems to be three possible outcomes.
Scenario 1. It seems that the most likely outcome is Joe Biden will win the presidency, but the Republicans will maintain their Senate majority. Luckily for investors, this divided government may be the most market-friendly of the three scenarios. This is because Biden would likely be far more cooperative and less chaotic than Trump as president. We could expect more bipartisanship to get legislation passed; and a Republican Senate majority would limit proposed tax increases for corporations and individuals, as well as reining in projected tougher regulations. On the downside, we would expect more modest pandemic-related stimulus than if the Blue Wave had succeeded, which could result in a slower economic recovery.
Scenario 2. At time of writing, there remains a potential path for a Democratic Sweep to materialize, putting Democrats in control of the White House and both houses of Congress. This result is believed to be less market-friendly, however the impact will be mixed. Based on some estimates, the most realistic components of the Biden policy program could add $1.5 trillion in additional federal budget deficits over the next 10 years, as well as a larger pandemic-related stimulus package of approximately $2 trillion in 2021-2022. It is believed this large fiscal expansion could add up to 1.2 percentage points to the expected real GDP growth rate next year.
Scenario 3. The least likely outcome would be a win by Donald Trump as president, in conjunction with a Republican Senate majority. This would likely result in the status quo for economic policies including continued downward pressure on interest rates, more modest fiscal stimulus, and tax cuts would be more likely than increases.
Both scenarios 1 and 2 would likely result in a period of instability. As outgoing president Trump would be unlikely to provide the economic stimulus the U.S. needs as the pandemic continues to surge south of the border. Any aid could be targeted at specific sectors that Republicans favour, with little chance of aid for struggling state and local governments.
Trade Implications. A Biden win would likely be much better for global trade. We would expect to see a thawing of trade conflicts with U.S. allies that resulted from Trump’s sometimes incoherent views on how trade policy affects the global economy.
The Federal Reserve. As it has been the case for several years, the Federal Reserve is likely to play a greater role in the markets than the federal government. The Fed has signalled that it is extremely interested in keeping credit ample and interest rates low for both consumers and businesses. Current Fed Chairman Jerome Powell (a Trump appointee) would likely remain in place under a Biden presidency. Powell is seen as having a steady hand and his continued leadership would reassure the market.
It is always difficult to predict election results, and how those results will affect the market. As always, I believe it is better to tune out the noise and focus on the long-term, stay diversified and stick to your financial plan.
Have a great weekend,
Tracey
Source: Mackenzie Investments Chief Economist Todd Mattina and Chief fixed Income Strategist Dustin Reid, webcast on 11-03-2020
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