Will Trump Be Fired, And Does It Matter?
The US presidential election in November is likely to have a big influence on whether we’ll see the record performance of the US share market continue, writes Andrew Kenningham of Capital Economics.
7 October 2021
Since Donald Trump was elected as president, it’s surprising how little financial markets have cared about US political developments. In fact, last year the benchmark US equity index, the S&P 500, rose by 29 per cent, significantly more than in other advanced economies, despite a simmering US-China trade war and impeachment proceedings against the president.
Until now, the market doesn’t seem to have been affected by concerns about the next presidential election.
A close call
Opinion polls and betting markets suggest that the election will be a close call between Donald Trump and the Democrat candidate – though who the latter will be won’t be clear for several months yet. US election campaigns are famously dominated by arguments about the economy. But there’s been no clear tendency in the past for the share market, or the economy, to perform better under a Republican or a Democrat administration.
In the US and elsewhere, political changes usually seem to make no difference to either the economy or financial markets. However, the next election just might be an exception, because US politics are so polarised, and the policies put forward by the candidates are so different. So, it’s worth looking at the three likely outcomes, starting with another victory for Donald Trump.
Donald Trump 2.0
Trump will almost certainly be the Republican candidate, after celebrating his impeachment acquittal early February. If he goes on to win a second round it could lead to a renewed escalation of the trade conflict with China and continued tariff uncertainty – neither of which is good for the share market. But some of his other policies would continue to favour big business. Trump may cut corporate tax rates further and abolish some business regulations. And he might replace the chair of the Federal Reserve with someone who’s more willing to loosen monetary policy. Overall, I suspect that this will allow the share market to continue to do relatively well, even if the economy itself does not – at least in the short term.
President Biden: Liberal
The second scenario is that Joe Biden, the current Democrat frontrunner, becomes president. Most mainstream economists would be most comfortable with a Biden victory. He’d probably shift the country back to more liberal trade policies, while keeping up the pressure on China on intellectual property rights and government subsidies. And he has talked about a more predictable foreign policy and more responsible fiscal policy. That said, a Biden presidency may not do much to boost the share market in the short term, because it wouldn’t follow Trump’s tax-cutting and deregulation agenda.
A radical left-wing government
The third scenario would be victory for a more radical, populist Democrat. Elizabeth Warren dropped back in the opinion polls over January, but either she or Bernie Sanders may well win the Democratic nomination and make it to the White House. I believe a victory for one of these candidates would make it much more likely that the super performance of US shares would come to an end. Warren and Sanders are both running on platforms designed to clip the wings of big business and to boost the power of workers to push for higher wages.
Falling corporate tax rates have pushed along the US share market since Trump’s 2017 tax cut, which boosted earnings per share by about 10 per cent. All the Democrats would at least partly reverse that cut, but Warren’s and Sanders’ proposals look more radical than most. They also plan to boost the powers of anti-trust authorities to make it easier for them to regulate, or break up, monopolies.
Warren suggests splitting the largest tech firms into platforms and providers, and has said that Amazon, Google and Facebook should be split into separate entities. Meanwhile, Sanders has repeated his intention to break up financial institutions deemed ‘too big to fail’. This may be good for the economy in the long run by boosting competition and curbing monopolies. But in the short run, it could be damaging for the share market.
We’ve seen in the past that measures taken to break up monopolies had a big negative effect on the share market. Take Standard Oil during the 1900s and 1910s. More recently, the peak of the dot-com bubble in 2000 coincided with a ruling that Microsoft should be broken up, although that judgement was later overturned.
A lot at stake
The outlook for the US economy may not be dramatically altered by this year’s presidential election, but there’s a lot at stake for investors. So, they’ll be looking closely at the Democratic Party primaries, in particular Super Tuesday on 3 March, and at the opinion polls, as the November election day approaches.
Correct as at 7 February 2020.
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