Perspektiven

Johanna Kyrklund: Trump or Biden - should investors really care?


There are two things I’m being asked about constantly at the moment: Covid-19 and the US election. As a former politics student who’s always maintained my passion for the subject, I certainly feel more comfortable opining on the latter.

But as an investor, how much should I really care if the next US president is called Donald or Joe?

Although politics matters a lot more to markets than it used to, the answer is still probably “not a lot”.

When I first came to work in the City in the late 1990s, political developments were of little interest to most investors. The political consensus had converged on a socially liberal and economically conservative agenda. Electoral outcomes had little direct impact on markets. 

Times have changed. Today, political news has become a much greater source of volatility in markets; at times, just a tweet from President Trump has been enough to send markets into a spin.

Unlike the cosy political consensus of the 90s, politics has become more polarised. Particularly the arguments about how the economic pie is divided in a world where growth is more scarce and the gap between the haves and the have-nots is widening. At the same time, there has been a backlash against liberal attitudes on the social front. Trump’s arrival on the US political scene was symptomatic of these big picture trends.

Trump’s tenure as president has had a direct impact on markets, more so than most. The corporate tax cuts he introduced boosted corporate America, while trade tensions with China clouded the economic outlook, creating nagging uncertainty for investors over the past two to three years.

Most recently, Covid-19 has accentuated pre-existing trends. It’s highlighted new forms of inequality, such as in access to healthcare, damaged an already fragile economic environment and challenged the frameworks of fiscal and monetary policy.

Additionally, we have seen the eruption of the Black Lives Matter movement, bringing race relations to the top of the political agenda, as my colleague Piya Sachdeva discussed recently.

These are all factors that will be at play in what is likely to be another close-run contest. At the time of writing, the polls point to a win for Biden and a divided Congress.

Such a result would likely have a muted impact on markets as the new president’s ability to significantly change policy direction would be limited.

A Democratic sweep of Congress (i.e. a majority in both the Senate and the House of Representatives) could have more profound consequences, since President Biden would have much freer rein.

The Big Tech stocks, which have been dominating markets (as my colleague Sean Markowicz discussed last week), may be vulnerable as their high valuations reflect a perfect outlook. A strong Democratic victory might raise concerns that Big Tech firms will face tighter regulation, potentially clouding their prospects.

Another risk is that the election result is contested. President Trump has already cast doubt over the reliability of postal votes. If the polls narrow further and Biden wins by a small margin, the result could be contested, which would be highly disruptive to markets and the US economy.

The death of Ruth Bader Ginsberg this week may have added to the risk of a contested election result. Her death has sparked a debate over the make-up of the Supreme Court which looks like adding to an already hostile and divisive election.

So, what are my thoughts having been a fund manager through numerous political events? 

Politics can create short term noise. But if you can withstand the volatility, it’s best to sit on your hands and wait for it to pass.  

If you really have to trade, then it may be wise to bank any profits (such as from some of the Big Tech giants) before the election. But investors should always avoid knee jerk reactions when results come out.  

Although the market likes to focus on events like elections, political trends tend to play out over months and years. For example, should the Democrats complete a clean sweep, who is to say that regulation of Big Tech will be top of their agenda? There is likely to be other pressing matters to deal with and it could be some time until there is any negative impact.

In the meantime, as much as I would rather talk politics, the more important topic for markets and the economy is Covid-19. Here in the UK and across Europe, cases are rising and there is talk of going back into full lockdown.

The identity of the next US president is a sideshow in comparison.

 

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