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US election special: A Trump comeback?

As the US presidential race enters its final stretch, markets are laser-focused on the outcome, with the correlation between the stock market and opinion polls shooting up lately. The race has tightened substantially, with Trump overtaking Biden in the crucial state of Florida, so a sweeping Democratic victory that delivers king-sized stimulus packages is no longer quite as likely. Below we take a deeper dive into the various scenarios, how likely each is, and how markets might respond.

Trump down, but not out

Just five days to go until the US election and markets are starting to get nervous. Biden is still leading Trump by a comfortable margin in national opinion polls, but the gap has narrowed, especially in the crucial battleground states that usually decide the victor.

In a stunning reversal, Trump has now taken the lead in Florida according to the polling average by RealClearPolitics. Florida is the largest swing state in terms of electoral votes and the most important, as the candidate that won the Sunshine State has also taken the White House in every presidential race going back to 1964.

Everyone is therefore waiting with bated breath to see if Trump can pull another rabbit out of the hat and prove the pollsters wrong again. For the markets though, it is not just about who will be president. The other variable is whether the president’s party will also control both chambers of Congress. If not, much of the legislative agenda might be vetoed by the opposition.

This time in particular, the prospect of massive fiscal stimulus hangs in the balance. If the Democrats take full control of government, investors expect them to pump trillions in fiscal relief. Otherwise, we might be staring at several years of political gridlock and the odds of gigantic relief packages drop drastically.

Democrats win everything = Stimulus on steroids

This is the scenario where the Democrats take the White House and the Senate, and retain control of the House of Representatives, giving them full control. Betting markets currently assign a ~51% probability to this.

Markets expect massive stimulus in this case. Even though Biden has also pledged to raise taxes on corporations, capital gains, and wealthy individuals, that part of the agenda may be postponed or abandoned altogether, as raising taxes in the middle of a recession would be economically disastrous. Hence, this scenario is expected to boost the stock market.


Within the stock market, Biden has vowed to move towards ‘green’ energy, so the biggest losers may be oil companies and the biggest winners may be renewable energy names. Oil giants like Exxon and Chevron could take heavy fire, but smaller oil and natural gas firms with lots of debt – like Marathon, Occidental, Devon, and Apache – might lose even more as solvency fears return. With the same logic, renewable energy names like NextEra and anything linked to that space – like Tesla – may get a boost on expectations for bigger tax exemptions.

But massive stimulus packages also imply massive government deficits, so the US dollar would stand to lose in this scenario as investors dump US bonds. Staying in FX, the Australian and New Zealand dollars could be big winners on expectations for calmer US-China relations, alongside the Chinese yuan.

President Biden + Republican Senate = Gridlock

If the Republicans retain the Senate, they will likely block most stimulus proposals that come from a Democrat President in the name of ‘fiscal discipline’. Betting markets currently give the Republicans 45% chance to retain the Senate, so it is essentially a coin toss. That is also in line with what opinion polls suggest.

For stocks, this could be the most bearish result, alongside a contested election. The dollar would likely gain initially amid the risk aversion and as deficit concerns are priced out, but could soon reverse lower as the Fed would be expected to do much more to support the economy on its own.

President Trump + divided Congress = Some stimulus

Trump wins, but Congress remains divided. This is essentially what we have now. It is a relatively low-probability scenario according to the polls, but still quite plausible.

Equities could climb as some decent-sized stimulus may still pass, but any reaction could be minor. The dollar might spike higher on expectations for smaller deficits and more trade tensions, as Trump’s hostile stance towards China could continue to restrict global trade flows and therefore global USD liquidity.

Contested election = Brief but sharp selloff

This is the scenario that the election is very close, and if Trump loses, he disputes the result in the Supreme Court. We would end up with several weeks of uncertainty. It happened back in 2000 with Bush vs Gore. The stock market dropped 12% within five weeks, the dollar rose initially but then fell, and gold rose. However, this was the same time the ‘dot com’ bubble burst, so all this may not have been entirely election-driven.

VIX futures show that investors assign a high likelihood of continued volatility for at least a couple of weeks after the election, so this risk is taken seriously. In this case, even though markets may sell off initially amid the uncertainty, that might be seen as a buying opportunity once the smoke clears.

Does lightning strike twice?

Opinion polls are not perfect, but they are all we have. Yes, they were spectacularly wrong in 2016, however, pollsters have since adjusted their methodology to account for that error. And if one compares opinion polls now versus 2016, Biden has a much bigger lead than Clinton did against Trump at this stage both nationwide and in key battleground states.

That is not to say that Trump cannot win – he definitely has a path to victory, even if it is narrow.

In the big picture, over the past three decades, the stock market is usually higher three months after the election regardless of who wins, as the uncertainty is out of the way. The exceptions were 2000 and 2008, due to the crises.

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