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A clear US election result will calm investor nerves


After a summer lull, equity market turbulence is back. Last week marked the worst week for global stock indices since March, with the MSCI All Country World Index falling by 5.3 per cent over the five sessions. In the US, the S&P 500 lost 5.6 per cent, while the more tech-heavy Nasdaq Composite fell 5.5 per cent. Those falls came despite a series of impressive results for US tech groups and a strong rebound in the economy’s growth in the third quarter. Along with rising caseloads of Covid-19, uncertainty surrounding the outcome of Tuesday’s presidential election between incumbent Donald Trump and his Democratic rival Joe Biden lies behind these jitters.

The market turbulence reflects real fears that the election result will prove inconclusive, leading investors to panic that a volatile political climate could trigger violence and derail the economy. However, if that scenario is avoided there are reasons to be upbeat about how US markets could perform post-election.

No matter who wins on Tuesday, the market is likely to get the fiscal stimulus that investors have been asking for. If Mr Trump manages to pull off a surprise win, then he has pledged to unleash a “very big” package. However, analysts think the real boon for equities would be a “blue wave”, where Democrats take not only the White House but both houses of Congress too. Mr Biden has said he will devote $2tn to mitigating climate change, as well as trillions of dollars to strengthen the safety net for more economically deprived Americans. If the Democrats control both arms of government, then such a package becomes a real possibility.

Earlier concern on Wall Street over Mr Biden’s plans to pay for spending through raising corporate tax from 21 per cent to 28 per cent appears to have abated somewhat, despite the impact this would have on earnings. While there are clear winners and losers in terms of sectors — energy stocks, for instance, would probably gain more from a Trump victory — a boost for the market from having a clear winner appears a strong likelihood.

If the result does prove a close call and the political mood darkens, then the Federal Reserve can be expected to provide some succour for jittery traders. The pandemic has shown the Fed, under Jay Powell’s stewardship, to be an adept crisis manager. It is credible to think that, if volatility intensifies, the US central bank will step in as it did in the spring. It is not out of firepower. Despite cutting its benchmark overnight rates to near zero, there is much monetary policymakers can do to enhance credit conditions for businesses — especially smaller ones, which have benefited less from the actions the Fed undertook during the spring. The US economy is also resilient, snapping back rapidly from a disastrous second quarter to expand by an annualised rate of a third in the three months through September as consumers spent big.

Even if there is a conclusive result to the presidential election, volatility is unlikely to disappear completely. It is not only market turbulence that has made an unwelcome return; it is the virus too. Across much of Europe, test and trace programmes have failed to bring caseloads under control. France, Germany and the UK have all announced fresh lockdowns to curb transmission rates. Caseloads are also rising in the US. Until western societies are more successful in mitigating the virus, either through vaccination or through improvements in treatments or testing, expect trading conditions to remain volatile — whoever is in the White House.

Swamp notes

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