With the November 3 US election just over two months away, Joe Biden, the challenger, is in a similar position to Bill Shorten prior to the 2019 poll.
Biden is well ahead in the opinion polls and is rated a near certainty by the bookmakers. Like 2019 in Australia, this is an election that is there for the challenger to lose. But, as I will describe below, many on Wall Street believe they will decide the presidency.
For Australia, the US attitude to China is vital. China is recovering rapidly from the virus and it seems that by 2028 China’s economy will be as large as the US, in dollar terms. The candidates have similar attitudes to China, but Trump will be tougher on the US’ economic rival, which wants a Biden victory.
Back in May I was yarning with Christine Todd, the Boston based US fixed income head for Amundi, Europe’s largest investment manager. At that time the bookmakers had Donald Trump as a hot favourite. But we knew COVID-19 was a big threat to Trump and we decided to talk again in late August. We expected that, if, by September, the US economy was depressed by the infection rate, then Trump might be in trouble.
As it turns out, while the pandemic is still severe in the US, small businesses, which employ half the US workforce, are becoming increasingly optimistic and have started to hire. Indeed Todd says many are now reporting skills shortages. Indicators like retail sales and new and existing home sales have been strong. Large retailers are beating profit estimates and Wall Street is at record levels
In the key area of managing the economy, Trump ranks well ahead of Biden in the opinion polls.
This leads many on Wall Street to believe that Trump can overcome his opinion poll deficit. He was behind by a similar amount at this stage of the 2016 presidential election. Moreover, 58 per cent of voters who support Biden do so because they dislike Trump, rather than support Biden.
Biden stumbles
Trump needs a major Biden stumble. Todd says that the first area of danger for Biden is the infection rate itself. The Democrat organisers were horrified over the weekend when Biden committed what they believed was a gaff – vowing that if the infection rate rose sharply, Biden would shut down the US economy. A lot of Biden small business supporters and their employees were horrified: they don’t want to go through another deep slump.
Second, Biden is promising a green revolution and the model for that revolution is in California – the home of Biden’s vice president nomination, Kamala Harris.
Like NSW, Victoria and South Australia, California invested heavily in renewables without sufficient back-up. So in the hot summer months the state is suffering blackouts.
Many Americans fear that Biden will make the same mistake as California in his proposed green revolution.
Thirdly, Biden is planning big tax rises for corporations and richer Americans. At this stage, Wall Street either thinks Trump will win or believes that the technology revolution, the increased consumer spending and low interest rates will boost profits to nullify tax increases.
Biden has a major capital investment program that is very much orientated towards American minorities and he proposes to minimise inequality by spending massive amounts of money.
Many black and other American minority voters who have developed businesses and taken the first steps on the higher income ladder are horrified that they are being persecuted by the professional protesters. This is a Biden danger.
Finally, again from California, there is state legislation that effectively bans independent contracting and forces independent contractors into an employee relationship instead of a contracting relationship.
Biden and Harris plan to extend the Californian bans on independent contracting throughout the US. Already Californian courts have moved to use the legislation to force Uber to change the relationship with its drivers so that they become employees. The matter is still before the courts but Uber threatening to pull out of the highly lucrative California market. A great many Americans supplement their base income by using their cars via the Uber network. Those employed by large corporations tend to see the California legislation as a way of protecting lower income earners. But a vast number of Uber drivers are about to lose their income, which has an eerie similarity to Bill Shorten’s franking credits disaster. The Californian IT industry is threatened.
The election is also being held against the backdrop of not only rising share prices but a transformation of the bond market. Back around June, corporate bond prices had slumped and the yields available were strong. But the low interest rates have sparked a resurgence in corporate bond buying, which has lowered yields on most rated corporate bonds to around 2 per cent. That is fine for companies that are in good shape but dangerous when applied to suspect companies
Picking a winner
Now to the Wall Street belief that the stock market has a nearly perfect track record of predicting the winner in US presidential elections.
According to Ryan Detrick, senior market strategist at LPL Financial, the S&P 500 has indicated the winner 87 per cent of the time, and every time since 1984.
Detrick says when the S&P500 has been higher in the three months before the election, the incumbent party usually won, while when stocks were lower, the incumbent party usually lost.
No one expected Hillary Clinton to lose back in 2016 but the Dow had a nine-day losing streak directly ahead of the election, while copper – more of a President Trump infrastructure play – was up a record 14 days in a row, setting the stage for the change in party leadership in the White House. Trump needs the current strong market to continue and the optimism about treatment methods and a vaccine are key drivers - thats why Trump keeps talking about treatments and vaccines.
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