Key Takeaways

  • In normal times, presidential elections don’t have a great impact on financial markets, as the business-cycle is typically the driving force. However, these are not normal times, and “election risk” is already having an impact.
  • Global investors are not only facing trade and policy-related “election risks”, but also a possible Covid-19 second wave and double-dip recession, along with overextended equity and bond valuations.
  • More recently, President Trump’s vow to replace Supreme Court Justice Ruth Ginsburg prior the election and China’s military threat to Taiwan have investors bracing for a highly volatile, “risk-off” market for the remainder of the year. The US dollar tends to do well as a safe-haven currency in such markets.

“The only way we’re going to lose this election is if the election is rigged.” President Trump said at a rally in Wisconsin last month1.

Investors may be underpricing market volatility after the elections. Many investors are braced for turbulent markets in the lead-up to the elections, but may be underpricing market volatility after the elections. A Biden victory, and a sweep should Democrats take the Senate, may lead to a drawn-out, contentious, contested election or a potential constitutional crisis. The dollar may be vulnerable if global investors foster fresh doubts about the US and its policies going forward.

Biden’s tax hike. Trump lowered the corporate tax rate in 2017 from 35% to 21%, which boosted earnings and stock prices (the “Trump bump”)2. If elected, Biden plans to hike the rate to 28%. Goldman Sachs predicts that such a hike would take about 12% off the total 2021 EPS of the S&P 500 firms3. That may increase the appeal of foreign stocks (and foreign currencies) in 2021 and beyond after years of US shares outperforming other G-10 markets.

Biden’s moderate foreign policies.

  • China. Biden may extend Trump’s China policy, but implement it differently. He plans to restore high-level, regular meetings with President Xi and his officials, engage more with our allies and coordinate policy decisions4. Recent China-Taiwan military tensions aside, a more stable US-China relationship could see the Chinese yuan make further gains against the dollar.

  • Europe. Biden is pro-European Union, and his views on climate change are akin to Germany’s. In contrast, Trump favored Brexit; he said he’d like to see more exits from the EU5. Traders are seeing a Biden win as a tailwind for euro strength.

Four election scenarios, (betting odds)* and forecasted market impact:

  1. Democratic sweep (48% chance): A steeper yield curve, a weaker dollar, weaker equities but eventually rebounding with more fiscal stimulus.

  2. Biden and a Republican Senate (22%): Lower market volatility, a flattening yield curve, a weaker dollar (but less so than with a sweep), and steady equities -- “a positive outcome for Wall Street, but less beneficial for Main Street.”

  3. Trump and a Democratic Senate (18%). A flattening yield curve, a strong dollar and higher equities.

  4. Trump and a Republican Senate (12%): A steeper yield curve, a slightly weaker dollar, and lower equities. A low probability event, but at least some investors are expressing concern about economic, social and global stability should Trump enjoy a second term with a rubber-stamping Senate.

Final comments:

Biden currently leads Trump in both national polls and in betting odds, but the spread is narrowing. Investors are bracing for volatile markets in the lead-up to the elections. In this “risk-off” environment, our long-term bearish view on the dollar remains intact, but may have to be put on hold until the dust settles. At least in terms of limiting the time for post-election disputes, the federal “safe-harbor” rule requires final resolution by December 8.

Presidential debates are scheduled for Sep-29, Oct-15, and Oct-22.

Interesting factoid: whenever the S&P is lower from the end of August to the election, the incumbent party has lost the White House in all six instances.


*Averages from smarkets.com and predictit.com

1 Ian Schwartz. “Trump: The Only Way We Lose The Election Is If The Election Is Rigged.” RealClearPolitics. August 17, 2020

2 Steve Denning. “Understanding the Trump Bump: Forget About Jobs.” Forbes. Dec 10, 2016

3 John Kartch. “Goldman Sachs: Biden Tax Hikes May Pose Greater Economic Threat Than Coronavirus.” Americans for Tax Reform. June 11, 2020

4 Alex Ward. “Joe Biden’s plan to fix the world.” Vox. August 18, 2020

5 David M. Harszenhorn. “Trump officials ask which country will be next to exit EU.” Politico. January 13, 2017

Please feel free to reach out to your SVB Currency Advisor for a deeper discussion about FX, what impact it may have on your firm, and ways to mitigate risk.

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Scott Petruska, CFA
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Scott Petruska, CFA
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