US election: the biggest risk to markets is a contested vote

Democrat Joe Biden is tipped for victory in the US presidential election but investors are concerned Donald Trump’s plan to contest a defeat for him could knock stock markets.

Democrat Joe Biden is tipped for victory in the US presidential election but investors are concerned Donald Trump’s plan to contest a defeat for him could knock stock markets in the short term.

As the race for the White House comes to a head, Biden remains the favourite to become the next president of the US but Trump is already talking up the risk of voter fraud and there are fears he will refuse to step down from his position, putting the US on course for the first disputed election result since the Supreme Court ruled in favour of George W Bush in 2000.

As part of his defence, Trump has threatened legal action to block votes from critical battlegrounds being counted if they arrive after election day, which is expected to record one of the biggest voter turnouts in history and the outbreak of the coronavirus pandemic means a huge number of votes will be mailed in.

Speaking during his five-state rally, Trump said: ‘I think it’s a terrible thing when ballots can be collected after an election.’

He was referring to a Supreme Court decision that will allow ballots in Pennsylvania to be counted up to three days after election day.

Trump added that on election night ‘as soon as that election is over, we are going in with our lawyers’.

More than 60% of votes have already been cast, with Biden enjoying a lead over Trump and the majority of mail-in votes favouring the Democratic candidate. However, the lead Biden has over Trump in key battleground states has been narrower than expected, with key swing state Florida reporting a margin of just 1% between candidates.

Randeep Somel, equity manager for the M&G Select fund range, said ‘a repeat of 2000 is possible’ and there could be no declared winner on 4 November leading to ‘weeks of uncertainty’.  

The S&P 500 fell 8% while Bush and Democratic rival Al Gore awaited the decision from the Supreme Court in 2000, only recovering when it was given in Bush’s favour.

Somal said ‘incumbents are difficult to defeat’ and although the market and pollsters are expecting a Biden victory, he said: ‘It is worth remembering that Hilary Clinton won the national poll in the last US election, but lost the electoral college quite heavily.’

‘The election is reasonably close and it could still go either way,’ he said.

Worst-case scenario

Talib Sheikh, head of multi-asset strategy at Jupiter Asset Management, said the ‘worst short-term outcome’ would be a disputed result, although as Biden’s (pictured) polling has improved the risk of this outcome has declined.

Fawad Razaqzada, market analyst at ThinkMarkets, said investors were currently neutral on which candidate wins as both ‘will opt for big increases in fiscal spending over the coming months’ to dig the US out of a Covid-19 slump.

‘The biggest risk as far as I am concerned is if the outcome of the election is contested,’ he said. ‘If this potential result comes to fruition, it could trigger a big sell-off for stocks and other risk assets, and send safe haven dollar and yen higher.’

Jim Leaviss, chief investment officer of public fixed income at M&G, agreed that Trump refusing to leave the White House would hurt the dollar, bonds and all ‘risk assets’.

‘Anything that causes us to question the sanctity of western democratic law would be problematic, leading to issues around the state of the US dollar as the primary bond market, equity market, and currency market,’ he said.

Uncertainty over who has actually won the election on the final day of voting is likely to be a drag on markets, according to 

Chris Tinker co-founder of Libra Investment Services, said the uncertainty over who has actually won the election on the final day of voting is the biggest risk to markets.

‘It seems quite likely that Trump will appear to have won on the night given the mail-in ballot story, so unless that appears overwhelming in the swing states, we are likely to see that uncertainty persist for some days,’ said Tinker.

Tinker predicted, under a worst-case scenario, that the market could ‘fall around 30%’ if it is spooked by the outcome but also said ‘the upside opportunity has also expanded’.

‘A better than expected outcome for market – a clean win by either candidate, a resolution of the Covid-19 crisis via a vaccine or other game-changing events – could provide a 20-50% upside from here,’ he said.

More fiscal spending

Whether there is a game-changing event or not, both Trump and Biden support plans to increase government spending in order to dig the US economy out of its coronavirus slump, although politicians failed to come to a pre-election agreement on a new recovery package. 

Leaviss said a Biden victory would lead to ‘significantly higher fiscal spending’ in areas that would have the most impact on the nation’s output.

‘Trump has called for tax cuts for businesses and wealthy individuals, but that approach would be a lot less powerful for the economy,’ said Leaviss.

‘Generally speaking, if you give a wealthy individual a tax break, that person will save most of the money. But when someone on a low income gets a few extra dollars in their pocket, they are much more likely to spend it.’

By doing so, Biden could also encourage the US Federal Reserve to increase interest rates earlier. The market thinks the first hike will not happen until 2024/25 but ‘stimulatory fiscal policy would bring that forward by a couple of years’, said Leaviss.

Long-term US opportunities

Citywire AA-rated Timothy Parton, co-manager of the closed-ended JPMorgan American (JAM ) investment trust, said while there were short-term dangers, there are also long-term opportunities in the US market.

Parton is finding this opportunity in ‘next generation technology’, recently adding to his position in wireless technology company Qualcomm (QCOM.O), which will benefit from the move towards 5G infrastructure.

‘The semiconductor company is often overlooked due to its historical dependence on handset growth,’ he said. ‘However, the initial deployment of 5G networks has started to short through in Qualcomm’s results this year and this is a trend we believe is in the early innings.’

Parton is also looking at unloved financials for the longer term, particularly stocks outside of the core banks, which are struggling against low interest rates and tech-enabled companies.

Paypal (PYPL.O) is a name that sits at the intersection of both e-commerce and digital payments,’ he said.

‘Paypal has leveraged its first mover advantage…The brand has also expanded its global reach and has become part of your digital wallet.’

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