IN FOCUS6-8 min read

US election countdown: what investors need to know

American voters look set to see a rematch of Biden versus Trump next year. Each will have a very different agenda from the other if elected, but the ability to implement this will hinge on whether they can also secure control of Congress. We explore how the economy and various asset classes could perform under the possible scenarios.

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George Brown
Senior US Economist

In one year’s time, Americans will head back to the polls to elect their president for the next four years.

Incumbent Joe Biden is seeking a second term and – facing little opposition - is set to win the Democratic ticket. His predecessor, Donald Trump, faces a crowded field heading into the Republican primaries. But he has established a near 45 point lead over his closest challenger, Florida Governor Ron DeSantis. So, while nothing is guaranteed in politics, a second bout between Biden and Trump looks almost certain.

It would not be the first presidential rematch. There have been six in total, with the most recent being Dwight Eisenhower and Adlai Stevenson in 1956. But only one individual has been elected to a second non-consecutive term as president: Democrat Grover Cleveland, when he regained the presidency from his Republican rival Benjamin Harrison in 1892. And this was achieved partly because the nascent Populist party, which won 22 of the 444 electoral college votes up for grabs, subtracted more from the Republican voter base than from the Democrats.

Chart 1 Betting markets expect Trump to beat Biden, but could he lose some supporters to RFK Jr?

Betting markets expect Trump to beat Biden

Just as in 1892, it’s possible a third-party could disrupt the status quo. Robert F. Kennedy Jr. recently announced an independent presidential bid, having dropped his bid to become the Democrat nominee. He is currently polling as high as 14%, which would be the most for an independent candidate since Ross Perot won 19% of the popular vote in 1992, helping Bill Clinton to defeat the incumbent George H.W. Bush in the process. However, the jury remains out on whether RFK Jr can maintain his momentum and, if so, whether he poses a bigger threat to Biden or to Trump. 

Regardless of who eventually triumphs, victory will not mean much if they fail to take control of the legislative branch. All 435 seats of the House of Representatives are up for re-election and 34 of the 100 Senate seats will be contested. Each party currently controls one chamber each and by the slimmest of margins. This has hampered Biden’s legislative efforts since the start of this year, not least because a minority of ultra-conservative Republican lawmakers have been able to obstruct their own party’s leadership.

But assuming that either Biden or Trump manages to carry Congress along with the presidency, what might the implications for markets be?

Chart 2 Market returns have been sub-par since Biden was elected president

Market returns sub-par since Biden elected

What if Biden secures a second term?

Biden has many reasons to be optimistic about his re-election chances. Beyond the incumbency advantage, he is also overseeing a strong economy, tight labour market and sharply easing inflation. And the recent conflict in Israel could also provide some support, as rising geopolitical tensions have historically led to a “rally round the flag” effect. But despite these favourable factors, he continues to be dogged by low approval ratings. Not only is his popularity currently near the lowest level of his presidency so far, it is also below that of many of his predecessors at this stage of their first term.

Part of the reason for his unpopularity is because immigration has been rising up the list of voter concerns. Crossings at the US-Mexico border reached new highs in September amid a large increase in undocumented immigrants from Venezuela.

Polls also show that voters hold reservations about Biden’s age. He became the oldest president in history when elected in 2020 at 78-years old. By the end of any potential second term, he will be 86. Although Trump is just three years younger, one poll showed only 1% of voters considered him to be out-dated or elderly, compared to 26% for Biden.

Chart 3 Will Biden join the one-term president’s club?

Will Biden join one-term presidents club?

However, Biden is neither as unpopular nor polarising as Trump. This means that moderate, non-partisan voters might ultimately back Biden for a second term, even if it is reluctantly so.

He may also benefit from RFK Jr’s independent bid if it can go the distance. RFK Jr, a vaccine-sceptic who has tilted towards conservatism since ditching his Democratic bid, may split some of the anti-establishment votes that would otherwise have gone to Trump.

For these reasons, it would be premature to rule out Biden retaining the presidency.

If re-elected, Biden could look to resurrect his initial legislative agenda. His initial Build Back Better proposals in 2021 included $3.5 trillion of spending on environmental and social programmes, over 10% of GDP. After being trimmed down to $2.2 trillion by the House, it then faced opposition from centrist Democratic senator Joe Manchin, who is at risk of losing his seat next year’s elections. As a result, it was eventually watered down further to become the Inflation Reduction Act. While the $437 billion of stimulus this included was still sizable, it was just one-eighth of the original proposals.

Biden may attempt to enact some of the measures that were ultimately dropped, such as funding for subsidised childcare, universal pre-kindergarten or paid family and medical leave. But this could fuel growing concerns about fiscal sustainability, pushing Treasury yields higher still. Investors should also be wary of Biden potentially seeking to raise the top rates of corporation, income and capital gains taxes as well as tightening regulation in areas such as banking and healthcare. This might result in some equity sectors coming under some degree of selling pressure.

Chart 4 If re-elected, Biden may look to resurrect the unrealised $1.7tn of his Build Back Better Act

Biden may resurrect Build Back Better Act

Or will Trump complete his comeback?

Trump may be the bookies' favourite to win the election, but he must first secure the Republican nomination. While he is polling miles ahead of his other candidates, George W. Bush commanded an even bigger lead of over 50% in 1999 and nearly failed to win the nomination. After being roundly defeated in New Hampshire by John McCain, Bush went on to survive a make-or-break battle in South Carolina only to then suffer an upset defeat in Michigan. Finally, he managed to get his campaign back on course to win enough states on ‘Super Tuesday’ to force McCain to concede.

Also, Trump’s well-documented legal battles are set to keep him off the campaign trail as the primaries get underway. He is due in court on 15 January for the E Jean Carroll defamation trial, coinciding with the first-in-the-nation Iowa caucuses. And the trial for his alleged efforts to overturn the 2020 election result has been set for 4 March, just one day before Super Thursday, when 14 Republican state primaries are set to be held. Even so, his strong social media following means that Trump won’t necessarily be hindered by his physical absence.

Chart 5 Trump’s lead is formidable, but Bush Jr. almost ceded a bigger one in 1999

Trump has formidable lead

Assuming that Trump is successful in his bid to retake the White House, it is difficult to determine what he would seek to achieve given his reputation for bluff and bluster. According to PolitiFact, he broke just over half of his campaign pledges and only fully delivered on a quarter. And of his nearly 1000 statements that have been fact-checked, some 75% were found to be at least mostly false. Still, Trump’s fiscal pledges this year have been to repeal Biden’s tax hikes, “immediately tackle” inflation and end what he has called Biden’s “war” on American energy production.

When it comes to a second Trump presidency, the only certainty is uncertainty. For one, he could be convicted of a crime and incarcerated. This could well lead to a lengthy constitutional crisis and perhaps even insurrection. Also, his foreign policies could further isolate the US, particularly if he chooses to scale back sanctions levied against Russia. As a result, investors should brace for volatility which could result in a flight to safety that sees safe haven government bonds and gold rally.

Chart 6 Most of Trump’s claims are false and the majority of his 2016 campaign pledges were broken

Trump - false claims, broken promises

A close contest should benefit investors

It is difficult to predict how asset classes might perform under a second Biden or Trump presidency as we can only speculate on what their policies would be. But we can compare how markets shaped up during their respective first terms. Based on a 60/30/10 portfolio, Trump had overseen total returns of 35% at this stage of his term, in line with other first-time presidents since the early 1970s. But Biden, by comparison, has only delivered 8.5% at this stage of his presidency. And this would be lower-still if not for the ‘Magnificent Seven’ of high-growth tech companies.

But investors hoping that a second Trump presidency might boost returns could well be disappointed. Our analysis shows that returning presidents have generally seen lower nominal returns across major asset classes, with the exception of 10-year Treasury yields. But it is not all bad news. Inflation has historically been more subdued over second presidential terms, even when excluding the elevated rates experienced during the Jimmy Carter and Ronald Reagan administrations of the late 1970s and early 1980s. On top of this, GDP has typically been higher and unemployment lower compared to presidents’ first terms.

Chart 7 Aside from Treasuries, assets have historically seen lower returns under presidents’ second terms

Asset returns under second terms

Some of these differences in market performance may be partially down to factors unrelated to who occupied the White House. Global economic shocks such as the energy crises of the 1970s and the 2007-2008 financial crisis are prime examples of events that were beyond the president’s control. As was the pandemic and its aftermath, which has overlapped Biden and Trump’s presidencies. Another common feature of their presidencies is that they both started their presidencies with control of Congress. What looks less certain this time round is whether the winning candidate will be able to secure another trifecta.

Of the 34 Senate seats up for grabs, the three that are currently ‘toss-ups’ are all with the Democratic caucus in the Senate. As such, a Biden victory could easily see him paired with a hostile Senate. Likewise, Trump may well manage to clinch the presidency but lose the Republicans’ narrow 221-212 majority in the House if he were to lose the popular vote a third time. Either scenario would create a legislative roadblock for the president. effectively scuttling their ability to deliver the partisan policies they pledge during their campaign.

But gridlock on Capitol Hill should be supportive for markets. Divided governments are forced to compromise, which serves to moderate the more extreme inclinations of each party, providing a more stable policy backdrop for investors. Since the 1948 presidential election, US equities have averaged total returns of 14.3% when a president has had to contend with a split Congress compared to a more modest 13.0% increase under a unified government. This divergence is even wider on a party basis; Democratic presidents have seen gains of 18.8% under a divided Congress versus 12.0% under their Republican counterparts.

So, while there is still a lot that can happen before next year’s the election, the fact that the contest looks set to be a close one should be good news to investors.

Chart 8 Equities tend to perform better under a divided US government than a united one

Equities tend to perform better under divided government

The author would like to express his gratitude and appreciation to Ben Read, an economics placement student at Schroders, for his assistance in compiling the statistics and graphics used in this article.

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George Brown
Senior US Economist


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