Election 2020 possibly the most important in generations…

It is generally accepted that US Election 2020 is possibly the most crucial presidential election in generations, if not in US history. In 2016, Donald Trump upset the odds and came to power without any real political pedigree. During his tenure, he has been extremely divisive and has exposed and exploited the very real divisions in US society. He also adopted a very confrontational approach to international relations and had a very fractious relationship with former international friends and allies of the US. He pushed a strong nationalistic, inward looking agenda, and arguably did serious damage to the US’ longstanding status as leader of the free world.

He tapped into something in the US, and delivered what his supporters wanted him to deliver, as evidenced by the fact that he garnered considerably more votes in 2020 than in 2016, and he was only narrowly defeated. If President Trump had been re-elected, the possibility is that free from the shackles of election, Trump would have thrown caution to the wind in his second term and really move to push the various agendas that dominated his first term. This would not have been good for global trade, global growth, or global political stability. It may have been good for the US economy, but would have further increased divisions in the US, and further damaged the international political order. A Trump victory would also have given further belief to the nationalistic leaders and movements that are being nurtured around the world.

The election of Biden may not result in the reversal of these trends, but perhaps it might just slow some of them down. It is also important to bear in mind that Biden won narrowly, and on 20th January next he will take over a very divide and fractured country.

Trump leaves a mixed legacy…

Somewhat unusually for a politician, President Trump delivered a considerable amount of what he promised to deliver. He has cut corporation and incomes taxes; he cut red tape for business; he has clamped down on immigration and some of the ‘wall’ has been constructed; he has taken on China in an aggressive manner; and he has sought to re-negotiate or pull out of trade deals. He also packed the Supreme Court with conservative judges. On the other hand, he has failed to resolve the healthcare crisis; he has failed to rein in the US trade deficit; and the national debt has widened dramatically during his presidency, not helped of course by COVID-19. This health crisis exposed the real lack of a social safety net in the US, and the need for massive investment in infrastructure.

Trump was basically anti-free trade and anti-globalisation and did not believe in multilateralism. He took the US out of the Paris Climate Accord, and is in the process of taking it out of the WHO. The UN and NATO could have been next.

In terms of his management of the economy, arguably President trump presided over a relatively good period for the economy, at least until COVID-19 struck. In 2017, GDP expanded by 2.2%; in 2018 by 3.2%; and in 2019 by 2.3%. This year GDP growth is forecast to decline by 4.3%, and to expand by 3.1% in 2021. Without COVID-19, GDP would have been expected to grow by around 3% this year. COVID-19 has certainly taken the gloss off his economic legacy, but his handling of the crisis has not been good. Of course, he is not unique in that respect.

In the third quarter of 2020, the seasonally adjusted annualised growth rate expanded by a massive 33.1%. President Trump latched on to this number in the final days leading up to the election. This annualised growth number is basically calculated by raising the quarterly growth rate to the power of 4. Q3 growth was obviously exaggerated by a rebound from a very weak Q2 as a result of COVID. The reality is that growth in the third quarter was 2.9% lower than a year earlier, and was 3.5% lower than the final quarter of 2019.

The labour market performance under Trump was strong, at least until 2020. At the end of 2019, the unemployment rate was down at a historic low of 3.5% of the labour force. This jumped to 14.7% in April, and gradually declined thereafter to 7.9% in September. Total employment in September was still 10.4 million jobs lower than in February.

President Trump was good for the US economy, and despite the damage inflicted by COVID-19, his strong vote and ultimately narrow defeat were largely due to his economic management. The exit polls showed that the economy was the most important issue for many voters, and Trump was seen as a good choice by a large segment of the electorate.

President Trump was good for the equity markets. The cut in the corporation tax rate from 35% to 21% boosted corporate profits and share buybacks. The domestic economic performance was also quite good. Between 1st January 2017 and polling day on 3rd November 2020, the S&P 500 gained 49.1%. The gains would likely have been considerably higher but for COVID-19.

What might we expect from a Biden Presidency…?

The new President Elect, Joe Biden, who is now 77 and will be 78 by the time of the inauguration on 20th January, came in to this election with a long and experienced, albeit not particularly strong, political pedigree.

President Trump argued during the campaign that Biden would succumb to the wishes of the left and dramatically expand the role of government and do untold damage to business. This is somewhat ironic, as Trump has overseen a massive increase in Government involvement in the economy since COVID hit.

These accusations about Biden are not likely to materialise. Biden has been a centrist all of his political career and is not likely to radically shake up the economic or political landscape. It would not be in his nature. His Vice-President Kamala Harris on the other hand, would possibly be more radical if she were to assume the presidency for some reason.

The big question now is what we can expect from a Biden presidency. The platform on which he built his 2020 election campaign was titled ‘Build Back Better’. This basically revolves around fostering economic recovery; improving infrastructure; bringing broader benefits to lower income communities and minorities; improving education, R&D, and the skills of the workforce; and creating a greener economy and society.

This overall agenda is set to include some of the following:

  • A €2 trillion investment in Green Energy to radically cut carbon emissions. This would be bad for the oil industry and fracking and would fly in the face of Trump’s environmental policies over the past 4 years. From a global perspective this would be good, and he will probably also re-engage with the Paris Climate accord.
  • A significant increase in long-term infrastructure investment, which would have a significant fiscal multiplier effect. This would start to correct for years of under-investment in infrastructure. This expenditure would be funded by tax increases, with his tax changes targeted to raise $1.4 trillion over his 4-year term.
  • His tax policies include an increase in the corporation tax rate from 21% to 28%; higher income taxes for those earning over $400,000; and higher capital gains taxes for the very wealthy.
  • An increase in the Federal Minimum Wage from $7.25 per hour to $15 per hour.
  • More support for small business, through grants and other mechanisms.
  • Universal pre-school education; tax credits for childcare; and free public university education for families who earn less than $125,000 per annum.
  • He seems to believe in a soft form of protectionism. This could involve bringing supply chains back home by adopting a ‘made in America’ government procurement policy; tightening of the rules on labelling of products; and the use of US steel for transport projects.
  • He would likely promote multilateralism and seek to rebuild the damaged relationship with the EU and other countries. However, give the popular support for Trump’s approach to China, he is unlikely to row back significantly on the tariff regime with China, or indeed the fractious relationship between the US and China that gathered momentum during Trump’s presidency. However, Biden is an internationalist, and hopefully he will seek to rebuild the damage done to US international relations over the past 4 years. This would be good for global trade, global growth, and perhaps global political stability.
  • He would likely adopt a more constructive approach towards immigration, although he will have to be mindful of the popular support for some of Trump’s approach to immigration.

What might it mean for equity markets?

The aforementioned agenda does not look radical, and in fact looks very sensible from an economic and societal perspective. If implemented, this agenda should be good for the US and indeed the global economy. Traditionally, equity markets have tended to perform better during Democrat presidencies. It may not be as clear cut this time, given the elevated level of US equities.

It is estimated that the proposed corporation tax changes could trim S&P earnings by 9%, which would not on the face of it be good for equity markets. However, the investment programme in infrastructure, the Green economy agenda, and some of the other policies should benefit growth in the economy, and consequently, be good for equity markets.

There is some speculation that anti-trust laws could be used to address the tech sector. However desirable this might be, the markets would most likely not like it. Time will tell.

Biden will not find it easy…

For President-Elect Biden, the implementation of his agenda will not be straightforward.

The US is set to run a budget deficit of close to 16% of GDP this year, and the national debt is at record highs, equivalent to 106% of GDP. On the current trajectory it could hit 200% of GDP by 2050. The need for fiscal constraint could become a strong political pressure point over the coming years.

In addition, without control of both houses, the power of any president is seriously curtailed.

The Outgoing House of Representatives (435 seats) was controlled by the Democratic party. The Democrats had 232 seats; the Republicans had 197 seats; 1 Libertarian; and 5 vacant seats. 218 seats are required for a majority. The Democrats have maintained control of the House.

The Senate is controlled by the Republican party, who have a majority of 6. There are 100 seats in the Senate. The Republicans have 53; the Democrats have 45; and there are 2 Independents. Despite high hopes in the Democratic party, it appears likely that the Republicans will maintained control of the Senate, subject to runoffs in January.

The House of Representatives and the Senate are equal partners in the legislative process. Legislation cannot be enacted without consent of both chambers. The division of Congress will make it difficult for Biden to pursue his agenda, but this is the norm rather than the exception in US political life.

The Supreme Court is also controlled by conservatives, which will make it more challenging for a Democratic president. Perhaps the biggest issue of all for Biden is the fact that Election 2020 has really highlighted just how dangerously divided the US is.

For Ireland…

Arguably, a Biden victory would be better for Ireland than another 4 years of President Trump.

  • If the corporation tax rate is increased from 21% to 28%, this will make Ireland even more attractive for US multi-national investment. Given that post-Brexit, Ireland will be the only English-speaking country in the EU (excepting tiny Malta), so it could benefit from Biden’s tax policies.
  • Biden will likely engage more constructively with the EU, which would be good for bilateral trade, which would be good for the small, open, Irish economy.
  • In the context of Brexit, Biden would be better for Ireland. The speaker of the House, Nancy Pelosi, has said that the House would not ratify a UK-US trade deal, if the UK exit from the EU undermines the Northern Ireland peace process. Biden agrees with this perspective.

Biden also has Irish heritage, so his general approach to Ireland is likely to be warm and positive.