The market implications of a Biden victory

Former Vice President Biden’s polling average has reportedly improved nationally, to about a 10 percentage point (pp) margin, and in effectively every key swing state since the beginning of the month, with the exception of Ohio. Conversely, President Trump’s polling average has declined in most core swing states, though it has improved a bit in Republican-leaning swing states. Still, Biden’s polling average remains ahead in all of the key swing states except Texas, where he trails by 1.4pp, 7.6pp tighter than Trump’s 2016 electoral margin. Accordingly, FiveThirtyEight puts Biden’s chances at a high of 86 percent.

Furthermore, polls are suggesting that the Democrats are well poised to take control of the Senate, setting the scene for a favourable governing environment, whereby the president can pass through his policies more easily. PredictIt puts the chance of a Democratic Senate majority at 64 percent, off a peak of 70 percent at the beginning of October. Fivethirtyeight remains more bullish, putting the chance at 73 percent.

Markets have been reacting positively to a potential “Blue Wave” resulting from a Democratic sweep of the presidential and senate elections. Fiscal accommodation is expected to be a top priority for a new Democratic government, broken down into two categories.

First, the Democrats are expected to pass a Covid-19 relief bill, similar to the House’s latest HEROES Act bills, relatively quickly, which would provide the bulk of fiscal relief within 2021.

Second, the Biden administration has proposed spending plans which, if fully implemented, could come in around USD10 trillion over the subsequent 10 years. These include significant spending on childcare and education, healthcare, infrastructure and clean energy, housing, and paid leave. Even in a unified Democratic government, the risk is for these plans to become smaller rather than larger, albeit the ultimate result is net spending delivered to the economy. Subsequently, this is being interpreted positively by markets, on the assumption that this will bring about positive economic momentum in the years to come.

While Biden’s fiscal plans also include hikes to corporate tax, and high-earning individual tax rates, the revenue raised from these is unlikely to match this spending. The ultimate scope is to create a “robin-hood effect” that will bolster the welfare of the lower and middle classes. In practice, a democratic landslide would likely result in the reversal of the Trump-era Tax Cuts and Jobs Act, a continued move toward trade protectionism and industrial policy, and greater regulation of industry (especially in energy, technology, financials and healthcare).

Although these measures elicit negative connotations a prima facie, immediate market reaction may become more muted in the medium-term, as greater fiscal spending under this scenario should enhance growth, support inflation, and reduce unemployment, albeit at the expense of increasing fiscal deficits.

Despite the favourable polls, the general feeling is not to discount a Trump victory yet, as the President has proven time and time again to be able to beat the odds, as occurred in the 2016 election. Political analysts have conceded though that his Covid- related gaffes may have eroded public opinion a touch too far for him to recover this time.