Does the U.S. Presidential Election Pose a Risk to Markets?
Want to read more by Russell Investments? Visit their Featured Firm page here
With less than four months to go until Americans cast their votes for president, we’ve fielded an increase in questions from clients as to whether the U.S. presidential election poses a risk to markets and the economy. The short answer is yes.
As a preface, I want to make clear that writing blog posts about the potential impact of politics on the economy and markets is something I generally hate doing. Inevitably, whatever I write will anger someone. That said, these are issues that need to be considered by investors, and I believe it’s important to outline these issues and their potential impacts. So, here goes.
First, it’s important here to differentiate between the economy and the market. Yes, they are related, but they are not the same. In the long run, the stock market is a reflection of the economy, but it is not the economy per se.
When we assess the risks presented by the upcoming election in November, we see two principal ones, both of which could negatively impact markets:
- A re-intensification of the trade war with China by President Trump, as part of a re-election effort.
- A scenario where presumptive Democratic presidential nominee Joe Biden wins the White House while the Democratic party wins the Senate and retains control of the House of Representatives.
Let’s examine each in more detail.
Potential impacts of re-escalation in trade tensions
As we sit today, the president’s approval ratings have sagged, and both national and swing state polls show that he meaningfully trails Joe Biden at this very early point in the race.1 This recent weakness would appear to be a result of the COVID-19-caused recession and current public opinion related to the administration’s handling of the health crisis itself.
One of the key questions being asked by market participants is how this might affect the next political strategy of President Trump. Will his response be a return to both the strong rhetoric and policy that was successful for him in the 2016 election? It’s worth noting that the president’s rhetoric regarding China has clearly sharpened following the onset of the virus and weakening of the global economy. The concern now is that the administration’s policy toward China could turn back to where it was for most of 2019.
If that were to happen, global trade and the global economy could be negatively impacted again—just like last year, where we saw much slower growth across the board. This, in turn, would lead to a greater risk to the current economic recovery that started in mid-May—adding yet another weight to an economy already heavily burdened by the coronavirus pandemic. It goes without saying that a slower or more muted recovery than currently expected would have a negative impact on stock earnings (as seen in 2019) and, as a result, a detrimental impact on stock prices.
Could a Democratic sweep in November jeopardize the 2017 tax cuts?
The other concern is regarding a Democratic clean sweep, wherein the party wins the White House and control over both branches of Congress. In this case, it seems clear that the Trump corporate tax cuts of 2017 would be in jeopardy. As evidenced throughout the abbreviated U.S. primary season—cut short by the pandemic—much of the Democratic base questions whether these tax cuts are beneficial to wealthy shareholders at the expense of the middle class. (I am not commenting at all on the accuracy of that belief, but merely recognizing the message.)
That said, it seems likely that one of the early agendas of a unified Democratic government would be to either roll back the corporate tax cuts entirely (which we view as unlikely) or partially (which we view as more likely). This would have a direct impact on earnings—effectively the reverse of what we saw in 2018—and subsequently, a negative impact on stock prices. Consider that as a result of the 2017 tax cuts, earnings of S&P 500 companies increased by more than 20% in 20182, as lower taxes fell directly to the bottom line. If these tax cuts were to be rolled back, one could reasonably expect the exact opposite to occur.
The bottom line
While both of these risks are worth keeping an eye on, at this point we believe neither should come close to dominating investors’ thoughts when it comes to the relative attractiveness of equities. Why?
First of all, it’s still only July—and the real race for the presidency historically does not start until September at the earliest. Second, the U.S. government is designed specifically to make it extremely difficult to get big things done. In this case, it would likely take some time for any legislation aimed at scaling back the 2017 tax cuts to work its way through Congress.
We will continue to monitor these issues as additional economic and political events unfold, and the calendar inches ever closer to November. Stay tuned.
These views are subject to change at any time based upon market or other conditions and are current as of the date at the top of the page.
Investing involves risk and principal loss is possible.
Past performance does not guarantee future performance.
Forecasting represents predictions of market prices and/or volume patterns utilizing varying analytical data. It is not representative of a projection of the stock market, or of any specific investment.
This material is not an offer, solicitation or recommendation to purchase any security. Nothing contained in this material is intended to constitute legal, tax, securities or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type.
The general information contained in this publication should not be acted upon without obtaining specific legal, tax and investment advice from a licensed professional. The information, analysis and opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations for any individual entity.
Please remember that all investments carry some level of risk. Although steps can be taken to help reduce risk it cannot be completely removed. They do no not typically grow at an even rate of return and may experience negative growth. As with any type of portfolio structuring, attempting to reduce risk and increase return could, at certain times, unintentionally reduce returns.
Investments that are allocated across multiple types of securities may be exposed to a variety of risks based on the asset classes, investment styles, market sectors, and size of companies preferred by the investment managers. Investors should consider how the combined risks impact their total investment portfolio and understand that different risks can lead to varying financial consequences, including loss of principal. Please see a prospectus for further details.
Indexes are unmanaged and cannot be invested in directly.
Russell Investments' ownership is composed of a majority stake held by funds managed by TA Associates with minority stakes held by funds managed by Reverence Capital Partners and Russell Investments' management.
Frank Russell Company is the owner of the Russell trademarks contained in this material and all trademark rights related to the Russell trademarks, which the members of the Russell Investments group of companies are permitted to use under license from Frank Russell Company. The members of the Russell Investments group of companies are not affiliated in any manner with Frank Russell Company or any entity operating under the "FTSE RUSSELL" brand.
Copyright © Russell Investments Group LLC 2020. All rights reserved.
This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Russell Investments. It is delivered on an “as is” basis without warranty.