Joaquin Montfort | July 28, 2020
Insights from the monitor show Biden’s lead increasing but what could a Democrat victory mean for financial markets?
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It was not long ago that Donald Trump would boast that he could walk down 5th Avenue and shoot somebody and it would not affect his approval ratings - now he probably wishes that person was his opponent Joe Biden.
Such is Biden’s lead that according to our Election Media Monitor , his chance of winning is above 95.0% (it is actually 97.1% if you download the raw data), suggesting we may be living through one of those moments in history that mark a major shift in the zeitgeist.
How would the actual votes fall? Our U.S. election monitor projects that if the election were held tomorrow the result would be a Biden win by 308 electoral votes to 230 for Trump.
Our interactive map is showing Florida, Michigan, and Maine, as states where there may be a close race, yet even in these three marginals, Biden currently leads Trump, with the tightest race in Florida - yet even there Biden has a much greater 73.74% chance of winning over Trump’s 26.26%.
For best results, the election monitor’s projections should be analyzed in conjunction with official poll data: from past elections, we have found that when the two agree they reinforce each other, and when they disagree they indicate a less certain outcome. For most states they agree, however, in a handful of states, this is not the case.
The table below shows the states where the two fail to concur introducing some doubt into the result.
In all the above states, the monitor model projections based on alternative data are favoring Trump whilst the Polls are showing Biden in the lead.
Which is likely to be right? Our model suggests Trump has a higher chance of winning in all 5 states above - and it would indeed seem strange for Biden to take a traditionally Republican state like Texas, as polls are showing.
Yet even if our model is wrong and the polls are right concerning these 5 states, it still doesn’t change the central thesis that Biden will win the election, it merely means he will win by a greater margin.
Investors are sure to be asking themselves how a Democrat win will impact financial markets, and most reports say it will be negative for the stock market mainly because Biden has said he will roll back Trump’s corporate tax cuts.
There is also a discernible pattern in the way stocks react to expectations of a Democrat win based on what has happened in past elections. The pattern is for markets to peak in August prior to the election in November, and then to decline by 10% over the next 5-months.
A Democrat victory could also probably usher in a new era of greater scrutiny into how Fed financial aid and emergency loans are employed which may include restrictions on share buy-backs.
Sectors likely to be most affected are healthcare, financials, and industrials which have relied more heavily on aid. Limits on repurchases would probably lead to a significant reduction in the demand for these stocks.
Democrat plans to reform Medicare are also likely to see healthcare and big pharma stocks take a hit. As a result of Biden’s plan to “lower the eligibility age for Medicare – from 65 to 60 – and to ban insidious “surprise billing” practices (when someone checks into an in-network and is then transferred to out-of-network services and charged extortionately), hospital providers will incur higher costs and take in less money.” Says Jamie Gordon, a reporter for UK Investor Magazine.
More cost-controls and transparent pricing measures on generic drugs and repealing the law which bans Medicare from negotiating drug prices with suppliers would also see big pharma shares likely to take a hit.
Energy and construction, meanwhile, are two sectors favored by a Democrat win, as they would benefit from Democrat plans to invest $640 billion in affordable, energy-efficient, house-building programs.
From a macro-economic perspective, a Democrat win could mean a looser fiscal policy with more spending on social programs and a higher minimum wage, which would overall lead to higher inflation and a weaker Dollar.
This in turn would lower the Dollar-denominated debt liabilities of many emerging market economies and support their currencies reigniting investor interest in EM stocks.
A diffusing of trade war tensions would also improve the outlook for international trade supporting related sectors such as manufacturing, especially export-orientated companies such as car manufacturers.
On a more positive note for the financial outcome of a “blue wave”, “A Democratic victory could be positive, and would most likely include a steadier and more vigorous handling of the coronavirus crisis and a more open approach to international trade,” says Jeff Sommer, the Business News Editor for the New York Times.
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