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How Will Markets React to the 2020 U.S. Election?

Updated: October 29, 2020

With the U.S. presidential election nearing, market volatility has increased as early voting is reaching unprecedented levels with around 70 million, or more than half of the 130 million who voted in the 2016 elections already casting their ballots, according to the U.S. Elections Project. In this report, J.P. Morgan Global Research examines the implications of a range of potential 2020 U.S. presidential and congressional election scenarios that include the status quo, a “blue wave” or a Biden/split Congress, across a wide range of asset classes and sectors.

PODCAST

Biden vs. Trump: What Will the 2020 U.S. Election Outcome Mean for Markets?

14:57 Markets are increasingly anticipating a “blue wave”, but risks of a sudden, unexpected tightening in polls or a less straightforward election outcome remain. Joyce Chang, Chair of Global Research at J.P. Morgan and John Normand, Head of Cross-Asset Fundamental Research at J.P. Morgan discuss what to expect in the lead up to election day and what different outcomes mean for investors in the aftermath of polling day.

Time Remaining: 14:57

Joyce: Hi, I'm Joyce Chang, Chair of Global Research at JP Morgan, and you're listening to At Any Rate, our Global Research podcast where we take a look at the stories behind some of the biggest trends, themes and industries in markets today. Fears of an electoral process that could last weeks are abating as early voting is reaching unprecedented levels with nearly 60 million, or nearly half of the 130 million who voted in the 2016 elections already casting their ballots, according to the US Elections Project. Early in person voting is already under way in many states, and voters appear to have made up their minds. This election is likely to have a record turnout and Biden's keeping a wide lead over Trump.

Market participants are increasingly anticipating a blue wave of the likely outcome with limited time remaining to shift the momentum. Now, if it's an outcome other than the Biden win and a front loaded fiscal package, there's definitely room for disappointment. The main market risks remain of sudden, unexpected tightening in polls or an election outcome being less smooth and straightforward than what seems to currently hoped for by markets. I'm joined by John Normand, head of Cross-Asset Fundamental Research at JP Morgan, to discuss what to expect in the lead up to election day and what different outcomes can mean for investors in the aftermath of polling day. John, thanks so much for being with me.

John: Yeah, it's great to speak with you, Joyce.

Joyce: John, early voting is well under way and investor views have shifted over the last couple of weeks, and seem to have converged quickly around a baseline scenario of the benign Democratic sweep. Markets are seemingly convinced that this is going to be followed by a swift, big fiscal stimulus package. And now the focus is shifting to the Senate, given Biden's widening lead in the popular polls. So, if Biden wins the presidency but the Senate remains Republican, there could be some market disappointment on the approval of a sizable fiscal package, which could face significant challenges. Now that's a shift in market sentiment. A few weeks ago, there were more concerns that a blue wave would actually bring higher taxes. So, John, I just want to ask you, is this as simple as red versus blue? Is there a real difference between Democratic versus Republican Presidents when we look at this on a historic basis and how it's impacted the equity markets?

John: No, Joyce, I don't think it is as simple as red and blue. There is sometimes this conventional wisdom that a red administration, i.e. your Republican administration is better for the economy and therefore, better for the stock market. And that Democratic candidates are somehow worse for the economy and the stock market. But there's not a whole lot of historical evidence to support that. There has certainly been Republican Presidents who have presided over economic booms and very healthy stock market performances, like Reagan, to a lesser extent, Trump. But there are also Republicans who have been associated with very dismal economic performance in the US and a very poor stock market outcome. This is a former President like Nixon. By contrast, there are Democrats who have been bad for the stock market, like Carter, others who have been good such as Clinton and also Obama.

So I think rather than associating certain stock market outcomes with the party affiliation of a president, I think it's much more useful to think about the entire policy mix that a certain president might bring. Also, what is the business type of context that a president could be inheriting and what are the valuations of the market at the time. When you look at the backdrop through all those different dimensions, I'm biased to think that actually sweep is the better outcome for financial markets because a sweep facilitates large scale front loaded fiscal stimulus, such as you mentioned at the intro. There are gonna be some other issues associated with an entirely Democratic administration, namely what course regulatory policy might take.

But I think initially the reaction for financial markets would be positive because of the stimulus. And, I also think the emerging markets would very much welcome a Democratic Presidency because it suggests a calmer state to geo politics. So, it is gonna matter a lot in terms of who wins. So let me turn it back to you, Joyce, and get your opinion on these polls. Is it possible that this lead that Biden has will narrow substantially in a way that really could change the expected outcome of the race?

Joyce: It may not change the outcome of the race, John. But I do think that Biden's double digit lead is going to narrow as election approaches. Now, the Trump campaign is doing very sophisticated groundwork to get out the vote in areas with a deficit of white rural voters taking a playbook, the same that they did in the 2016 elections. And Democrats have not focused on the effort live, due mainly to COVID-19. The in person voting heavily favors Trump, two to one. But Biden has been favored two to one or even more by the mail in votes. So, Trump is going to look to remind voters that they're better off than they were four years ago, pre pandemic. He's also going to talk about a widespread effective vaccine should be available soon.

And he's also, I think, going to emphasize that his own experience with COVID-19 was not that bad and that he is not gonna re-shut the economy. So, I think what we're gonna see here is more of that type of tactic from Donald Trump. And Democratic control of the Senate is going to come into focus, on the fiscal package. It's very unlikely that during a lame duck session, you're going to see anything passed, irrespective of the election outcome. I think the market will realize this is something that's probably going to extend, decently into 2021 before you see resolutions. Neither party is likely to win a super majority of 60 that's required by the Senate to pass Federal legislation. And that leaves you with the budget reconciliation process, which only requires a simple majority of 51 votes.

But that's one off. It's an annual reconciliation that takes place in March and April, and there is some limitations on changing that framework. The cabinet appointments could have a far bigger impact on future policy direction and provide the first signals for what policy direction will look like. But John, I want to ask you, what are the risks that you see to a fiscal package under a blue wave versus a Biden split Congress? And what are you telling investors is the best way to hedge this type of risk?

John: So what I've been telling clients is that if Congress is still divided, whether Biden is the next President, whether Trump is reelected, we just have low odds of seeing a meaningful fiscal package agreed quickly. And a meaningful package to me is something that's valued at north of a trillion. It looks like the common ground between Republican senators and the House and also, the White House is only about 500 billion. And I think that's problematic for an economy that's falling and also for an economy which has a household savings rate that may have run down substantially by the time the new Congress is seated.

What I've been saying to clients about hedging is that there's limited scope to really hedge this adverse scenario by owning treasuries because the odds are already so low, because the Fed is unlikely to cut policy rates to a negative level. So, they really have to be satisfied with the number of second best hedges. These are ones that have worked in the past, not quite as well as treasuries, but well enough that I think they're still worth employing if one is focused on the idea of a split government. This is owning the dollar versus EM currencies. This is owning the Yen versus a range of currencies.

The newer one I might throw into that mix is owning high grade credit because I do think if the US economy is struggling around the turn of the year because of continued fiscal impasse, the Fed could be up sizing its asset purchases in the credit markets. And therefore, that's the risk that is better worth owning, rather than equities during this period of uncertainty. There's another risk around which way geopolitics goes, so Joyce, I wanted to ask you, what is your view on at least the US to China relationship under a Biden Presidency versus four more years of Trump?

Joyce: Well, John, you're right. 500 billion dollars on the fiscal would really disappoint the market. But I think the market may also be getting ahead of itself on thinking that you could see the tensions come down on the US China relationship. I think under a Biden administration, there would be less unpredictability, and a change in the tactics and the styles as Biden would go back to more multi lateral processes, like rejoining the Paris Climate Agreement, the World Trade Organization, the World Health Organization, the OECD. And that would temper the rhetoric and the tactics used by Trump in dealing with China. But the tension's going to remain high and it's here to stay, in my view.

Now, many in the Biden camp feel that China's engagement with the world has shifted away from the type of bipartisan consensus that dates back to Nixon, to an approach that's more confrontational under President Xi Jinping. Embracing a model that's increasingly state led and centralized. So, I think that Biden sees trade policy as a way to cultivate relationships abroad and the US would look to develop more global rules of the road, that all sides can agree on. Particularly focused on reigniting the Transatlantic relationship between the US and Europe. So, the existing tariffs on the imports from China, I think could remain in place. I'm not that hopeful those will be removed that quickly to maintain pressure for greater progress for reforms. I do think that Biden would shy away from these types of sort of personalized approaches or one off deals. And I think the Democrats are not going to introduce new tariffs.

But I do think that the framework for intellectual property, technology transfer and establishing joint ventures are all very complex. Very importantly, it's not just Biden. It's also the Congressional Democrats. They're going to retain a very strong focus on measures to increase China's accountability on transparency, human rights and advancing democracy. And I think the tensions are going to remain very high around these types of issues. So I don't see these tensions going away anytime soon. But beyond the geopolitics, John, could we see a resurgence of regulatory reform, particularly against big tech under a Biden administration?

John: Yes, absolutely. We just observed, there's a very clear swing in the regulatory pendulum with every new administration. After over three and a half years of a rather permissive environment on the regulatory side, the bias is towards something stricter in terms of enforcement actions or maybe even additional legislation that is put before Congress. And, this is important in a number of key sectors of the equity market. The tech sector, obviously, is in focus because of issues around anti competitive policies. The healthcare sector's in focus because of the possibility that the Biden administration will be pursuing an additional sort of public option in terms of insurance, and also some controls on drug pricing.

The energy sector's in focus through whether or not the administration will be allowing new drilling in US waters and on US land and what the pace of permitting would be for activity on private land. So there's a whole sort of list of initiatives which are a part of the Biden platform. They're nowhere near as punitive as some of the proposals that were made by the Warren campaign and the Sanders campaign during the primary. But they do represent a move in a more a stricter direction, relative to what's prevailed under the past few years under Trump. But keep in mind though, the most transformative regulatory actions always pass through Congress. And for that, the majority of 60 seats in the Senate is necessary, unless the Senate votes to change its voting procedures and only requires a simple majority.

Therefore, I would couch this whole issue of a regulatory regime, which is more punitive as a wild card, a negative wild card rather than a certainty that should make clients necessarily negative on these markets. There's another side though, that if their government does become more activist under a Biden administration, that some people can see this as bringing about a number of initiatives that imply more social good. Whether that's around a great recovery or reduced income inequality something that very much feeds into the ESG objectives of many investors, which they have held for a number of years. Joyce, I'm curious as to your view on this. What do you think a possible Biden administration would mean for Green recovery or income inequality initiatives?

Joyce: So, Biden's Build Back Better plan envisions two trillion of investment in renewables to achieve net zero emission in the power generation sector by 2035, and with the goal for the US to become a net zero emissions by 2050. It focuses on everything from adding eight million rooftop solar systems creating new jobs as well. It's really the centerpiece of the Build Back Better plan. In addition to that, there's also a focus on small businesses, increasing venture capital in some of the smaller business communities that are underrepresented. And also seeking to really focus on improvements in education through community colleges, more targeted assistance to low income students in the form of grants, rather than loans.

The Biden administration really has focused on the need to promote a Green recovery, address inequality, but still address the unemployment problem, just given the severe job losses that we saw under COVID-19. But John, I want to ask you. You talked about ways in which we could hedge some of the risk going forward. But which sectors are the ones that you think will fare best under this Build Back Better plan?

John: I think there are the obvious sectors, such as materials and industrials, which should be leveraged to any sort of infrastructure initiative. But given that infrastructure programs would take quite a while to actually, start being deployed, there are other aspects of the Biden agenda, if he is the President that are gonna be important. One could be some increase, in discretionary spending because stimulus checks would be given to many households in the US. And the minimum wage could be boosted. I think there would also be a strong client interest still in emerging Asia if Biden is the President. Because even though geopolitics won't lead to any reduction in tariff rates immediately, there at least is one less tail risk to worry about in terms of a sudden impulsive imposition of additional new trading restrictions.

One last point to remember is that many of the sector beneficiaries of a Biden administration, like materials and industrials are also beneficiaries of any developments on the vaccine front over the next several months. Even if Biden is not elected President, the Democrats don't sweep completely, a lot of these trades will still make sense in six months time, if some important things happened on the vaccine front.

Joyce: Thank you so much, John, for sharing your thoughts and your perspectives on the way the hedge around these elections and what might happen after the elections, as far as the sectors to focus on. There's so much to unpack here. And that wraps up our discussion for today. It's great to chat with you and thanks for joining me, John.

John: Thanks, Joyce. It was great to be here.

Joyce: For our listeners, please stay tuned for more episodes of At Any Rate, JP Morgan's Global Research Podcast series. This communication is provided for information purposes only. Please read JP Morgan research reports related to its contents for more information, including important disclosures. ©2020, JP Morgan Chase and Company, all rights reserved. This episode was recorded on October 26, 2020.

Presidential Polls and Policies: Trump vs. Biden

Democratic presidential candidate Joe Biden maintains a lead in major polls, as early in person voting is already under way in many states and voters appear to have made up their minds. This election is likely to have a record turnout and Biden has so far been able to maintain a wide lead over Trump.

The first safe harbor deadline at the state-level on December 8 is critical, as counting and certification must be completed prior to that day. Each state has unique laws and regulations governing voting across 8,000+ local jurisdictions. After two-thirds of the 50 states and the District of Columbia expanded voter access to mail-in ballots and election officials expecting record volumes, especially from states that historically had low mail-in rates, the overall processing time is likely to increase.

Joyce Chang Quote Market participants are increasingly anticipating a blue wave as a likely outcome, with limited time remaining to shift the momentum. Now, if it's an outcome other than the Biden win and a front-loaded fiscal package, there's definitely room for disappointment. Joyce Chang Chair of Global Research J.P. Morgan

“Market participants are increasingly anticipating a blue wave as a likely outcome, with limited time remaining to shift the momentum. Now, if it's an outcome other than the Biden win and a front-loaded fiscal package, there's definitely room for disappointment,” said Joyce Chang, Chair of Global Research at J.P. Morgan.

“A blue wave or Democratic control of the House, Senate, and White House would produce the largest changes in policy, but if Republicans retain the Senate or White House, limited new federal policies, fiscal or otherwise are expected until at least the 2022 Congressional elections,” added Mike Feroli, Chief U.S. Economist at J.P. Morgan.

Irrespective of the electoral outcome, the use of executive orders to dictate policy is here to stay given the rising level of polarization and stalemate over the past 20 years as most legislation requires a supermajority of 60 votes in the U.S. Senate for passage, which is unlikely to be achieved by either Democrats or Republicans.

Policy Proposals of Democratic Presidential Nominee Biden vs. President Trump’s Current Policies

Policy Icon

POLICY

Democratic Party Icon

BIDEN

Republican Party Icon

TRUMP

Corporate taxes Raise corporate rate to 28%, create minimum tax rate of 15% on book income Lowered corporate tax rate from 35% to 21%
Personal income taxes Restore top rate to 39.6%; raise capital gains tax to ordinary rate for those earning more than $1 million; wealth tax (details unspecified) Lowered federal rates from 10% to 39.6%; brackets to 10% to 37%
Trade Enlist U.S. allies to challenge China on trade; advocates enforcing existing trade laws while writing new rules that protect workers, the environment and labor standards America first policy involving withdrawal from TPP, renegotiation of NAFTA, trade/tech/investment war against China and early-stage trade war with EU
Healthcare Improve Affordable Care Act (Obamacare) by adding public insurance option, Medicare to negotiate drug prices, link domestic to international prices Failed attempt to repeal Obamacare in 2017
Energy Ban new leases for drilling offshore and on federal land; partially supports Green New Deal end fossil fuel subsidies; supports carbon tax; end fossil fuel subsidies; 100% clean energy by 2050 Opened more federal land to drilling; Reduced Iran/Venezuela output through sanctions
Tech and Comms Supports using anti-trust legislation to investigate anti-competitive practices No significant sector-specific policies, though DoJ, FTC & FCC investigations ongoing
Finance Support a financial transactions tax No signature legislation, but more finance-lenient interpretation of Dodd-Frank
Infrastructure $1.3 trillion plan, including green proposals No signature legislation
Immigration End family separation; protect DACA; create a pathway to citizenship; give more resources to better leadership/ training within ICE; don't decriminalize crossing the border Border wall; record contraction in legal immigration through visa limits
Monetary Policy No public comments Favors lower rates; two board seats remain open
Minimum Wage Raise minimum wage to $15/hr Federal minimum wage unchanged at Other $7.25/hr

Source: J.P. Morgan, campaign websites and public statements

How Will the 2020 U.S. Presidential Election Affect Stock Markets?

U.S. equities, credit and rates are priced consistent with elevated volatility well after Election Day, potentially due to a delayed or contested result. Despite the recent uptick in market volatility, the outlook for U.S. equity and credit markets is constructive. J.P. Morgan Research U.S. equity strategists now expect the S&P 500 to reach new highs of 3,600 by the end of this year. With fundamentals and balance sheet trends continuing to see improvement, S&P 500 earnings per share of $136 for 2020 and $170 for 2021 are also expected.

“The consensus view is that a Democrat victory in November will be a negative for equities. However, we see this outcome as neutral to slighty positive,” said Dubravko Lakos, Head of U.S. Equity and Quantitative Strategy at J.P. Morgan.

Central bank liquidity has helped enable a record $1.3 trillion in capital market activity year-to-date ($1.2 trillion debt issuance and $96 billion equity issuance), which has significantly lowered credit risk and allowed equity risk premia to compress in the midst of a recession.

Dubravko Lakos The consensus view is that a Democrat victory in November will be a negative for equities. However, we see this outcome as neutral to slighty positive. Dubravko Lakos Head of U.S. Equity and Quantitative Strategy J.P. Morgan

“We maintain our probability weighted S&P 500 price target of 3,600 for year-end. We see an 'orderly' Trump victory as the most favorable outcome for equities (upside to around 3,900). We also view gridlock outcomes as a net positive with market volatility likely subsiding and driving mechanical re-leveraging within equities. A ‘blue sweep’ scenario is expected to be mostly neutral in the short term as it would likely be accompanied by some immediate positive catalysts (i.e. larger fiscal stimulus / infrastructure) but also negative catalysts (i.e. rising corporate taxes),” added Lakos.

Apart from U.S. equities, emerging market Asian equities and currencies would also benefit due to a less-impulsive trade policy under a potential Biden administration. In the event of a Democratic sweep, J.P. Morgan Research recommends an overweight to China equities on the potential for stronger policy support, but an underweight to emerging markets elsewhere vs. developed market equities.

In Europe, the Stoxx Europe 600 should remain range bound into year-end, with the U.S. likely to stay the regional outperformer as it continues to benefit from favorable sector tilts and stronger earnings delivery.

Key U.S. Political Events and Electoral Reporting Timeline

Election Timeline Sep. 29, 2020 Presidential Debate Oct. 7, 2020 Vice Presidential Debate Oct. 15, 2020 Debate Presidential Presidential Oct. 22, 2020 Debate Nov. 3, 2020 Election Day which will likely become Election Week(s) "Safe harbor" deadline in which states must resolve any controversy over ap - pointed electors or other election disputes Dec. 8, 2020 Dec. 14, 2020 Electors of Electoral College cast ballots for president and vice president Deadline for the receipt of ballots Dec. 23, 2020 Jan. 3, 2021 117th Congress convenes Jan. 6, 2021 Congress counts electoral votes and declare winner Jan. 20, 2021 Inauguration Day

Scroll right to view more of the timeline

Source: J.P. Morgan Strategic Research

How Will the 2020 U.S. Presidential Election Affect Market Volatility?

Macro trades at the level of the index or Treasury yields and the trade-weighted dollar are less compelling given offsetting proposals within the Biden platform, like higher corporate taxes. Investment portfolios should not discount the possibility of a Trump re-election as Biden’s lead has narrowed in recent polls and the impact on sectors and factors (momentum vs. value, cyclicals vs. tech, Environmental Social Governance) could be dramatic.

“We think that political and economic convergence of the K-shaped ‘recovery’, i.e. convergence of COVID-19 winners and losers, is ahead of us and some unwind of the new normal lies ahead,” said Marko Kolanovic, Head of Macro and Quantitative Derivatives Strategy at J.P. Morgan.

Election-related event risk is much more expensive in equities and rates options markets compared to foreign exchange markets.

Josh Younger Pull Quote “The tendency of the market to project based on “The tendency of the market to project based on what information is available at the time can, what information is available at the time can, under the right circumstances, lead to significant under the right circumstances, lead to significant excess volatility in the weeks following Election excess volatility in the weeks following Election Day, particularly in rates and equities. U.S. rates, Day, particularly in rates and equities. U.S. rates, credit and equities are all pricing elevated risk of credit and equities are all pricing elevated risk of a delayed or inconclusive result while most forex a delayed or inconclusive result while most forex pairs are pricing the opposite.” pairs are pricing the opposite.” Josh Younger Head of U.S. Interest Rate Derivatives Strategy J.P. Morgan
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