This is issue 027 of WTF is Going on With the Economy?! Today’s issue is about the US election and what it means for the economy.
Today, millions of Americans are voting in what’s already the most engaged US election in decades.
Voters are deciding whether to keep President Trump and his Republican party in power or to shift course by sending former Vice President Joe Biden to the White House.
With 1/3 of the US Senate and the entire lower House of Representatives in place, this election will shape the tenor of the US’s and global community’s direction for the coming decade(s).
We want to look at what impact today’s event will have on the short-term economy. To do so, we’ll break down a few different scenarios.
Although the polls favor Biden by a wider margin than they did Clinton at this time four years ago, anything can happen.
Trump still has a path to victory, which could also keep the Republicans’ control of the Senate intact.
Trump’s future economic policy remains the same as his current one: focus on deregulations, lower taxes, transactional foreign relations, and zero-sum trade wars.
Investors and businesses know what they’re getting from him, even if it comes with the erratic Twitter edicts Trump prefers to use.
With a second Trump term, there would most likely be a stimulus program to help companies struggling through the pandemic, prioritizing fixing the economy over actively solving the health crisis.
Despite Biden being the favorite to win today, victory is far from guaranteed.
If he were to win, Biden’s economic plans would include increasing taxes on higher-net-worth individuals and companies (moving the corporate tax rate up from 21% to 28%. Trump lowered it from 35% back in 2017).
He would also take a more hands-on approach to regulate various parts of the economy, and financial markets are no exception.
That said, banks and other professional investors would welcome a Biden administration for its stability and his preference to reach middle-ground solutions to complex problems.
Yet, while Biden is a moderate, he has significant pressure from the Democrat party’s progressive wing to implement ambitious spending and tax programs.
Will this pressure force him to bring the government into more aspects of the economy, in turn slowing down market growth? Or will he take a more ‘middle-of-the-road’ approach?
For example, canceling student debt is a popular cause on the left but so would deprive pension funds who invested in the loans the revenue needed to pay retirees.
How would Biden reconcile a policy popular with the party’s future that would harm older and more moderate voters?
In terms of the pandemic, Biden would likely provide another round of stimulus to Americans.
However, his priority would be getting the virus under control at the expense of outright economic growth.
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A Contested election
One of the biggest fears from investors is that there is no clear result after the election.
With record mail-in voting, it’s unlikely we’ll have a final(ish) result until at least the end of the week, especially if it isn’t a blow out for either candidate.
If Trump or Biden believe that there was foul play, expect court challenges like we saw in 2000’s Bush v. Gore.
These challenges could get nasty and would play out until the end of the year.
There are some key differences between then and now. For one, there wasn’t a pandemic 20 years ago.
Second, stock markets were down in the face of the dot-com bubble burst. Right now, stock markets are trending upwards.
In any case, a contested election would add additional volatility (risk) to the market, with amateur day traders continuing to ride that snake.
Mixed control of the Senate and White House
In addition to the Presidential election, there’s a strong possibility that the Senate’s majority flips from Republican to Democrat.
While a Biden win plus the Democrats gaining control of the Senate would solidify his ability to push through his agenda, what happens if the Republicans maintain control in the upper chamber?
Most likely, Biden would have limited options to enact his economic policy.
He could use what’s known as “executive orders” to reroute funds where he sees fit.
Plus, he’ll get to pick a Treasury Secretary that acts as the nation’s checkbook.
However, these two tools aren’t a substitute for congressional-driven fiscal policy.
If the Senate stays in Republican control, but Mr. Trump gets the boot, the economy will be on its own.
Likewise, Trump could win re-election but lose control of the Senate. This scenario could be politically explosive.
Would the Senate be able to use its force to override Trump vetoes and implement progressive economic policies?
Would there be another impeachment from the House leading to Trump’s removal from office by the Democrat-controlled Senate?
If this possibility becomes real, pop the popcorn, and hold onto your butts; it’s going to get intense.
What to remember:
So now that we know the different scenarios, there are few points to keep in mind.
Professional investors hedge their bets. In 2016, most were caught off guard by Trump’s victory.
Immediately following his election, there was a massive sell-off of US futures and stocks. T
he US dollar subsequently strengthened, bringing it almost even to the Euro.
Of course, someone made a lot of money on the opposite side of these trades, but the fact that markets reacted so violently shows how many people missed it.
The markets quickly recovered, and investors enjoyed three years of solid growth.
This year, smart investors are ready, hedging their portfolios accordingly.
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Exchange rates can vary, but the election won’t be the only factor in the currency markets.
A lot is going on right now in the economy (which you undoubtedly know from being an awesome subscriber to this newsletter!).
Exchange rates are already quite volatile. Currency traders are ready for an outright Trump or Biden victory.
What will move the FX rates is how both the US and European states respond to the economy’s dire condition.
Europe will need to figure out how to support itself after governments put their countries back into self-inflicted lockdowns.
The US needs to extend benefits from earlier this year that expired this summer.
Whichever region moves first will move the exchange rate way more than the election will.
It will take time to know the final results. That’s both okay and terrifying.
The pandemic’s unique circumstances, combined with record voter turnout, means that it will be impossible to count all votes tonight.
That in itself is fine and surprisingly normal, especially with over 150 million ballots expected for this year.
What is concerning is if one party claims that there was voter fraud because they disagree with the preliminary results.
If that happens, the contested election scenario mentioned above will play out.
Economic policies take time to ripple through the economy, especially since the new government only comes into power in January.
Whenever a government or central bank makes an economic policy change, its effects can take months before rippling into all corners of the economy.
After today’s vote, the new congress and presidential term don’t begin until mid-January.
Suppose that one party wins the White House and all of Congress.
Even if they were to pass a bunch of legislation on their first day, it will be mid-February at the very earliest that we’ll start to feel any policy changes.
There’s still a pandemic raging, which takes priority over the election.
This election is huge and will change the course of the West for the foreseeable future.
Conquering this pandemic is still the immediate priority for everyone, even if each party’s methods vary wildly.
Economists and investors acknowledge this reality.
We aren’t going to see any meaningful stability in the markets until we figure out how to extinguish or live with the Coronavirus.
That’s it from us. Thanks for reading! Do you know someone who is curious about today’s election but doesn’t know how to answer their questions? Share this newsletter with them (please and thank you)!