As we would probably all be aware of by now, the 2020 US presidential election is just around the corner. President Donald Trump is running for re-election against his Democratic challenger, former vice president Joe Biden. We can expect to see results to start coming in on Wednesday afternoon (our time).
Regardless of your personal feelings about the election and the candidates themselves, I think it's a good time to evaluate which outcomes would be benevolent, and malevolent, for our ASX share market.
Elections matter to the sharemarket. Often, presidential candidates and the parties they are running ahead of, have vastly differing visions for how they want to shape and structure the US economy. And how the US economy is structured has a direct relationship with the US stock market, and by extension, or own S&P/ASX 200 Index (ASX: XJO).
Election season
So which outcome would be best for ASX shares? Well, let's just say that the worst outcome would be an uncertain or contested result. Markets hate uncertainty at the best of times and having the world's largest economy and market with a leadership vacuum for a month or longer would be a terrible outcome for global markets in my view.
But getting that scenario out of the way, let's look at the options.
Reporting in the Australian Financial Review (AFR) today suggests that the best outcome for markets would be a Democratic 'clean sweep'. This would involve Joe Biden winning the Presidency, as well as the Democratic Party winning a majority in both Houses of Congress (America's parliament). Whilst the presidential election is going to be the most-watched election this week, remember at the same time, elections for the full US House of Representatives, as well as a third of the US Senate, are also taking place.
Some possible scenarios to consider
The AFR notes that if the Democrats sweep all 3 elections (sometimes referred to as a 'blue wave'), the prospects of passing larger additional stimulus bills would increase dramatically. Larger stimulus means more money in the economy, which obviously is great news for US companies and the global economy (and markets), at least in the short-term.
However, if Biden or Trump wins the presidency, but the opposing side wins one or both houses of Congress, it could result in much smaller stimulus measures, or even gridlock.
The AFR quotes New York-based TPW Investment Management chief investment officer Jay Pelosky as stating the following on potential outcomes:
A Blue Wave would lead to stimulus akin to the already approved House bill for roughly $US2.2 trillion ($3.1 trillion) and would represent the start of what I expect could be a surprisingly active and progressive Biden administration.
A Trump win and Republican Senate would suggest a smaller stimulus sized around the White House $US1.5 trillion proposal.
A Biden win and a Republican Senate would result in gridlock, be extremely problematic for the US place in the world and near-term lead to a small stimulus – think Senate leader Mitch McConnell's $US500 billion program.
Foolish takeaway
So at this point, a 'blue wave' Democratic sweep looks to be the most market-friendly outcome, for both the US and Australia's ASX. According to the AFR, current polling is suggesting this outcome is a definite possibility (around a 75% chance) as well, but not a done deal. I guess we shall have to wait until Wednesday to really find out how the markets take the result!
