While the uncertainty that has followed the US presidential election may have caught some by surprise (markets were convinced Joe Biden would win comfortably), investors shouldn’t be overly concerned. We should note, however, that as yet the result is still too close to call and it may take days or even weeks to finally reveal the winner.
Markets or polls may not have predicted the closeness of the race, but after initial weakness as markets imagined the consequences of a contested result, the FTSE 100 and other European indexes have largely performed robustly. Meanwhile, the US S&P 500 has also risen strongly in morning trading today.
So, as investors, how do we view the landscape?
A contested scenario – where one participant or both disagree on the outcome and the courts may have to decide – is obviously the worst case for investors, at least regarding short-term volatility in investment markets. This is a situation we are mindful of, but it may not come to pass.
From an economic standpoint, there is a clear divergence on how the two candidates may implement various policies. On the effects of climate change President Trump is a sceptic and today is the day the US officially leaves the Paris Agreement, no matter who wins – a move which could, of course, be reversed if Biden wins.
Biden may also choose to reengage more vigorously with the World Trade Organisation, and while the rhetoric from the candidates on the trading relationship with China may be at different volumes, there may not be much between them in how they actually deal with the world’s second biggest economy.
However, it is on US domestic policy that likely matters more to markets and here there is some clear water between Trump and Biden. The former vice-president could initiate business and some personal tax increases and tougher regulations on areas that affect climate change. Government as a whole will be bigger, with a bigger tax take and greater levels of spending – reversing some of the moves of the Trump administration.
The short-term investment outlook
US markets performed strongly since the end of October as participants felt a clear Biden victory was more likely – a position not necessarily an endorsement of Biden, but a hope that any unnecessary uncertainty could be mitigated.
However, we expect some volatility in investment markets to remain, at least until there is more clarity around the result. We also expect any actions by the Federal Reserve to be in a holding pattern, and there remain questions about the size and timing of the stimulus that may be deployed to counter the effects of measures taken to control the coronavirus.
There is no long-term significant difference to markets, however, whoever is in power – a Democrat or a Republican. Markets are typically positive around 55-70% of the time. Although returns are usually lower in the year following an election compared to the year of the vote.
Whatever the outcome of the US election we are not making any immediate, material changes to our portfolio positions. This may naturally change over time, but our approach remains to build efficient and diversified portfolios to deliver a smooth path of returns for our investors.
Please note, the value of your investments can go down as well as up