Political uncertainty: impact of US election on markets

With the US election looming, our US-based Chief Market Strategist, Tony Dwyer, explains why trying to determine what it will mean for markets is an impossible task. Instead, we should look at it in reverse: what can markets tell us about the US election?

In a true statement of the obvious, this is the most complicated election-year setup we could possibly have. There is incredible uncertainty over:

• How the voting process is going to work

• How to insure against possible voter fraud

• Which candidate will win the presidential vote

• Whether the Democrats will sweep the board, taking Congress, the Senate and the White House

• Whether either side will concede defeat anywhere near election day.

We can already see the issue of the nomination of the next Supreme Court Justice having an impact on this fragile environment.

Frankly, the outcome of these issues is truly unpredictable, and we believe making an investment decision based on the political landscape at this point would be simply guessing. Instead, we remain focused on what we do know: that the continuing pandemic, coupled with the lack of further fiscal action, means the Federal Reserve (Fed) is likely to reinforce or even accelerate its aggressive monetary policy accommodation for years to come.

Expect higher taxes if the Democrats get a clean sweep

If the Republicans retain either the White House or Senate there is little risk of a significant change in the tax code, but if the Democrats retain the House and win the Senate and Presidency we would expect a meaningful change in tax policy as already outlined in the Biden team’s stated proposals. They plan to:

1. Increase the corporate income tax from 21% to 28%
2. Double the minimum tax on the profits earned by foreign subsidiaries of US companies from 10.5% to 21%
3. Restore the top individual income tax rate to 39.6% from the current 37%
4. Increase the social security earnings cap
5. Tax capital gains as ordinary income for taxpayers with over US$1m in income and tax unrealised gains at death
6. Cap itemised deductions
7. Phase out small business income deduction above US$400,000.

However, even if the Democrats do score a resounding success, it is unclear how fast they would be able to move on the above policies and which proposed tax hikes might be modified.

Be guided by the market

While most people are focused on who will win the White House and Senate, we are far more worried about whether either side will accept the outcome – or whether we will even know the result for days or possibly weeks after the election. As a result, it is impossible to base any investment decisions on the outcome until we actually know what it is.

The good news is that the market may give us a clue as to who may win in November. In studying the history of the market performance in presidential election years since 1900, we found the Dow Jones Industrial Average (DJIA) tends to see a sharp drop BEFORE the election in years where the incumbent party loses versus typically moving higher throughout the second half of the year when the incumbent party wins (see below).

For now, at Canaccord Genuity in the US, we are staying with our game plan of adding exposure in the economic recovery areas on corrections, and waiting until there is a more definable edge in the election framework, before guessing what the possible impact might be.

Speak to one of our experts

If you have any questions about the issues raised in this article or would like to find out more, please get in touch with us or email wealthmanager@canaccord.com. Please remember, if you hold an account with Canaccord, you can check your portfolio value at any time, through Wealth Online or by getting in touch with your Investment Manager.  

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Investment involves risk. The value of investments and the income from them can go down as well as up and you may not get back the amount originally invested. The information provided is not to be treated as specific advice. It has no regard for the specific investment objectives, financial situation or needs of any specific person or entity.