US Politics and Policies Quick takes on the US elections

28 Jun 2024

In the wake of the first general election debate between Joe Biden and Donald Trump, we have received questions from investors regarding the procedures by which the Democratic Party chooses it nominee. We answer the most frequent inquiries below. We do not express a view on the probability of another individual being awarded the nomination.

1. How are delegates to the Democratic Convention awarded to prospective candidates? Delegates are awarded based on the results of state primary elections. The state-by-state primaries have now concluded.
2. Are the delegates obliged to support the candidates in accordance with the results of the primary elections in each state? Pursuant to Democratic Party rules, delegates must “in all good conscience reflect the sentiments of those who elected them.” This is generally interpreted as a binding commitment, although there is some imprecision in the text of the rule.
3. Can the Democratic Party change the nomination rules? Yes, the Democratic National Committee could change the rules ahead of the convention. But this is unlikely as the overwhelming majority of registered voters affiliated with the Democratic Party expressed their preference for President Biden in his campaign for a second term.
4. Are there enough uncommitted “super delegates" (e.g., current and retired office holders) to alter the result? No. Democratic Party rules state that super delegates are only allowed to cast a vote if a candidate does not win a majority of the delegates on the first ballot. The president has more than enough delegates to win on the first ballot.
5. If the president decides to withdraw before the convention, does Vice President Harris automatically become the Democratic nominee? No. The delegates currently pledged to Biden would be free to vote for whoever they prefer. The vice president would have a distinct advantage, but other candidates could submit their names for consideration and seek support.
6. What happens if the president withdraws from the campaign after the convention? The Democratic National Committee would choose a replacement candidate, but the process is without modern precedent.
7. Are there plans to hold a virtual convention before the planned convention dates in August? Yes. There are plans to hold a virtual roll call vote in advance of the Democratic National Convention in August because the State of Ohio has imposed an 7 August deadline to certify presidential candidates for the November ballot. The virtual roll call vote would allow the party to place a Democratic candidate for president on the ballot in Ohio.

28 Jun 2024

The nationally-televised debate on Thursday evening between America's two presumptive presidential candidates was unprecedented in a variety of ways. First and foremost, while both individuals have a sufficient number of committed delegates to capture their party's nomination, neither one has been formally nominated. No other general election debate is scheduled until the third week of September, after the conventions, which suggests that both campaigns believed they had something to gain from an early engagement.

The structure of the debate, with muted microphones and the absence of a live audience, was expected to favor Joe Biden. It did not. Donald Trump used the format effectively to deflect the moderators' more uncomfortable questions and focus instead on other topics to his advantage. President Biden was very subdued as the debate got underway, with a stiff gait and a hoarse voice. He ceded control of the narrative almost immediately to his predecessor and failed to assuage concerns over whether he could withstand the rigors of another four years in office.

Another debate between the two candidates has been scheduled for September. President Biden, should he choose to accept the Democratic nomination, will affirmatively want to engage in that debate. Former president Trump, now holding an advantage, may be reluctant to offer Biden a second opportunity.

The US electorate remains unnervingly polarized, and we expect to see a great deal of discussion over whether investment portfolios should be reexamined. Adjusting one's longer-term financial plan abruptly in the wake of a single debate more than four months in advance of an election entails risk and may end up being counterproductive. Longer-term portfolio construction is best treated as an apolitical exercise.

However, with that said, for those investors intent on making some tactical adjustments, managing one's exposure to sensitive sectors is a good place to begin. The consumer discretionary and renewable energy sectors could lag in performance in a “red sweep” scenario. On the other hand, the financials sector, has more potential upside in that scenario.

20 Jun 2024

The upcoming US presidential election looks set to increase market volatility. We can already identify a distinct “kink” in the VIX futures curve around November, indicating expectations of higher US equity volatility around the election day.

Recent polls give the Republican former President Donald Trump a narrow lead over Democratic President Joe Biden, at 40.8% versus 40.2% based on FiveThirtyEight’s national polls tracker as of 18 June. Theoretically, that leaves a significant portion of voters who remain undecided and will likely determine the election. However, at this stage in the cycle, national polls may be less useful than polls in the most competitive states.

We assign a 45% probability to a “red sweep” scenario of a Trump victory and Republican control of the Senate and House of Representatives; a 40% probability to a Biden victory with a divided Congress (Republican-controlled Senate, Democratic-controlled House); a 10% probability to a “blue sweep” (Biden victory and Democratic control of the Senate and House); and a 5% probability to a Trump victory with a divided Congress. But the key takeaway at this stage is that the outcome remains uncertain, and no single outcome can be considered as “likely.”

It’s important to remember the principle that investors should vote at the ballot box and not with their portfolio. In particular, we think investors should ensure that political fears don’t lead them to defer investment decisions that would otherwise support their long-term financial goals. Investors should also be aware of how political sympathies can impair objective judgements.

Academic research supports the belief that political affiliation has a direct impact on one’s level of optimism regarding the future direction of the economy.¹ Investors who share an affiliation with the party in office are more likely to believe that financial assets are undervalued and respond by increasing their allocation to equities.² Conversely, investors disappointed with the outcome of an election often adopt a risk-off strategy. This partisan bias can have a meaningful impact on returns.

However, while we believe portfolio construction is best treated as an apolitical exercise, the election will impact markets and government policy. The 2016 election, when Donald Trump was elected, led to divergent outcomes, and while the assets affected may differ this time around, we expect volatility. We therefore think it is prudent for investors to consider the potential risks to their wealth and manage those risks accordingly.

¹Maarten Meeuwis and Jonathan Parker et al., “Belief Disagreement and Portfolio Choice,” National Bureau of Economic Research, Working Paper 2510, September 2019; Yosef Bonaparte and Alok Kumar et al., “Political Climate, Optimism, and Investment Decisions,” University of Miami, February 26, 2012; Marian Moszoro, “The Party Politics of Stock Market Investing,” George Mason University, March 25, 2019; and Harrison Hong and Leonard Kostovetsky, “Red and Blue Investing,” Princeton University, March 2010.

²Bonaparte, Kumar et al., “Political Climate, Optimism, and Investment Decisions.”

31 May 2024

A New York jury found former US President Donald Trump guilty on 34 counts related to the falsification of documents around payment to an adult film star ahead of the 2016 election. This marks the first time a former US president has been found guilty of a crime in the US. The trial judge is scheduled to sentence Trump on 11 July, just days before the 15 July Republican National Convention. Following the ruling, Trump said he was innocent and suggested “the real verdict will be on 5 November.” The case is one of his four criminal trials currently under way in the runup to the November election.

Our view: Early voting begins in June and culminates in the 5 November vote, which means this may be the only Trump trial to reach a verdict prior to the bulk of voting. It is unclear how this court outcome might impact the electorate, but in key swing states, Trump holds a 2–3 point advantage, and surveys indicate inflation and cost-of-living concerns are the primary focus for centrist and independent voters. While a pickup in market volatility can be expected in the lead-up to the election, we continue to believe that portfolio construction is best treated as an apolitical exercise. We expect Fed policy, inflation, and corporate profit growth to remain key market drivers this year, and we continue to see a supportive macro backdrop for quality bonds and stocks.

23 May 2024

Investors don’t like uncertainty, so we shouldn’t be surprised if we see a pickup in equity market volatility as November’s US election nears. In addition, geopolitical tensions, including the ongoing wars in Gaza and Ukraine, have the potential to trigger market volatility. The rise in gold prices following the death of Iranian President Ebrahim Raisi in a helicopter crash this month serves as a reminder of this potential.

As the election nears, market focus on specific policy measures is likely to increase. In the past month, US President Joe Biden announced new tariffs on imports of Chinese electric vehicles, advanced batteries, solar cells, steel, aluminum, and medical equipment. Duties on EVs are to be increased to over 100%. China vowed retaliation, with the Ministry of Commerce saying Beijing would take measures to defend its interests.

With only 4% of US imports from China and less than 1% of China’s total exports impacted, the economic ramifications of the latest tariffs are small. However, the wider trend is that, regardless of which candidate wins the US presidential election, we expect to see more protectionism, more obstacles to free trade, and a fracturing of the status quo ante. We note that while former President Trump initially introduced several tariffs, President Biden retained most of those when he assumed office.

That said, there are likely to be some differences in the way in which protectionism is implemented. We would expect Biden to continue using tariffs on a more targeted basis, with a focus on China and a limited number of other countries. Trump may use tariffs more broadly as a point of leverage to extract concessions, and while his primary focus may be on China, he would likely not exempt geopolitical allies, including in Europe. (For our analysis of the potential outcomes under different scenarios for control of the White House and Congress, see our ElectionWatch report, “Politics beyond borders,” published March 2024.)

Portfolio construction is best treated as an apolitical exercise, but differing policies are likely to mean a different impact on markets depending on the victor. With stock market volatility currently at low levels, this speaks to considering capital preservation strategies within equities, as well as being both selective and diversified in international market exposure.

Gold and oil remain valid geopolitical hedges, in our view. Gold should additionally benefit from strong central bank demand and falling rates. We expect gold prices to reach USD 2,600/oz by the end of the year, as the aforementioned market dynamics likely drive fresh exchange-traded fund inflows. We also see upside for oil prices (we forecast Brent crude at around USD 87/bbl by the end of the year) amid solid demand and efforts by OPEC+ to balance the market. Risk-tolerant investors can consider selling Brent’s downside price risks for yield.