Market Update
October 23, 2020

Thoughts on Post-election Policy

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With less than two weeks until the US election on 3rd November, the election remains a key event risk for markets and top of mind for investors.

Accordingly, this week’s Weekly Market Update considers the most likely outcome – as indicated by both poll aggregators and betting markets – and its consequences.

Advantage Biden?

First, on the presidency. Polls and betting markets continue to show a steady advantage for the Democratic candidate, Joe Biden. This does not mean Trump cannot win, but rather that it would require a game-changing event, sizeable errors on polling, or possibly both for that to occur.

Second, there has been much debate about when the result of the election will be known, in large part due to the disproportionate number of mail-in ballots. As things stands, betting markets indicate – with roughly a 75% probability – that the result will either be known on 3rd November or a few days after. If the race tightens from here, this number will fall, and a contested election will become more likely. Markets will not like a contested election as it will lead to uncertainty and the potential for civil disorder.

Florida Is Key

One key state that market participants will be paying close attention to is Florida. Florida starts counting postal votes once they arrive, and so have already started counting. In practice, a clear Biden victory in Florida would render it almost impossible for Trump to win the Electoral College. According to the latest poll aggregator data, Biden is polling 4 percentage points ahead of Trump in Florida and observers would expect to know the result around 23:00 EST on election night.

Finally, with regards to the Senate, polls and betting markets continue to modestly favour the Democrats. The Democrats currently have 47 seats, including allies, and would need 50 to control the Senate. The latest polling data suggests they are very likely to lose their current seat in Alabama, but gain seats in Arizona, Colorado and Maine. Taking control would, therefore, likely depend on winning one of North Carolina or Iowa. Furthermore, the Senate is unlikely to be resolved by the end of the night so this could become a key area of uncertainty. All in all, while the markets indicate a Democrat-controlled Senate, the size of the potential Senate majority is more important than ever since the higher the majority in the Senate the more likely it is that less centrist policies get passed.

If the above materialises – that is, a Democratic White House and Senate – the policy implications are less ambiguous. This would likely entail fiscal stimulus, an infrastructure plan, and tax hikes (in that order), which should lead to growth-sensitive stocks outperforming. In light of this, investors may find it fruitful to hold a meaningful allocation to equities.

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