This is Part II of a mini-series that looks at the US Presidential Elections. Part III will consider how investors can position their equity portfolio via sector choices in light of upcoming policy shifts.
Our previous article in this mini-series noted that the greatest electoral risk to financial markets could stem from a disputed US election, which could precipitate a political crisis with severe negative spillovers for the real economy and global asset prices. Odds of a smooth election process increase when one candidate wins decisively. Given Democratic challenger Joe Biden has developed a considerable lead in the polls, the chances of a Democratic sweep (Presidency plus control of both houses in the Congress) have risen with betting markets now favoring this scenario.
Such an outcome would represent a meaningful shift in the investment environment. Conceptually, the Trump administration could be described as having pursued a policy mix that could be equated with ‘broad beta’ support for corporations via lower corporate taxes and regulatory relief. This approach mirrors a wealth transfer from the government balance sheet to corporate balance sheets since the tax cuts widened the budget deficit. Both levers helped expand profit margins and improve earnings. Indeed, operating earnings for S&P 500 companies hit an all time record during the third quarter of 2018. Importantly, while there was some differentiation among corporate beneficiaries, all corporations were net gainers.