2020 US Election: What the Polls Could Mean for Policy and Markets

The field is set for the 2020 US presidential election, and markets are turning their focus to November’s contest. Historically, political transitions haven’t had much impact on the economy and markets. But with the political spectrum and breadth of potential policies widening, that will likely change.

That’s all the more true because of the circumstances in which we find ourselves. The ongoing COVID-19 crisis and resulting policy responses will likely make this election result more meaningful than normal.

Of course, we can’t predict the electoral result for the presidency or Congress, and even the market’s reaction is unclear. Four years ago, conventional wisdom said a Trump win would create policy uncertainty and be bad for equity markets—today, markets are at record highs. However, given the stakes of this election, investors would be well advised to track a few key themes.

Key Factors: Fiscal Stimulus and Tax Policy

In our view, the most important policy factor that will drive financial markets over the next several months is fiscal stimulus.

With the US economy still reeling from COVID-19, future growth rests heavily on government spending to replace lost household income. Financial markets are even more reliant: the equity market seems far above levels that the economic environment alone would justify. So, markets will be watching to see if the result makes stimulus more or less likely.

The second most important policy factor for financial markets will likely be tax policy. Equity markets have received a shot in the arm from the tax cuts passed in 2017, which bolstered corporate profits. The possible reversal of these corporate tax cuts will also be a meaningful influence on the market.

To assess the likely impact of the election on these issues, we’ve created a grid (Display) with the four potential outcomes (assuming Democrats keep control of the House of Representatives in any case). These include a red wave and a blue wave, in which one party controls both the Senate and presidency.