Despite Donald Trump’s enjoying a slight upswing in popularity in the run up to US polls, PhillipCapital analyst Yeap Jun Rong is expecting Democrats to win a clean sweep of the Presidency, House and Senate come November. A “Blue Wave” is the most likely scenario at 35.1%, followed by a Trump presidency with a united Democratic Congress at 24.8%.
A Biden victory would be good news for markets, as the S&P500 has tended to see better returns under a Democratic President. A “Blue Wave” has historically seen the S&P500 post annual returns of 12.26% -- the second highest return after a Democratic Presidency with a united Republican Congress (19.46%). Democratic Presidents tend to see higher market returns than Republicans across all scenarios.
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In a September 25 report, Yeap argues that this difference boils down to policy choices. “The Republicans tended to stimulate the economy through tax cuts, which may have a lower fiscal multiplier,” he says. Democrats on the other hand prefer to stimulate consumption through infrastructure spending and redistribution policies, which may carry a higher fiscal multiplier.
Democratic administrations therefore tend to see higher economic growth due to the greater size of their fiscal multiplier. Historically, US annual real GDP growth under a Democratic president averaged to be around 4.26%, while that of a Republican averaged around 2.31%.
Yeap believes that under a “Blue Wave”, foreign policy risks are less likely to take place as Biden uses multilateral and less hostile means to engage China and hold back on tariff escalation. While bold fiscal stimulus measures led by green energy sectors are likely to be passed, markets can also expect corporate taxes to rise from 21%-28% and more regulation on environmental, technology and financial sectors. The fiscal deficit will widen no matter who eventually wins the White House, says Yeap.
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Yeap thinks that this policy approach is unlikely to change even if Republicans were to retain control of the Senate. But the magnitude of such policies may be more subdued as the GOP calls for less government regulation, lower taxes and greater control over fiscal spending. Still, says the PhillipCapital analyst, fiscal stimulus is likely to persist, though lower tax revenue is likely to weaken Washington’s spending capacity.
A Trump victory will, on the other hand, see a tougher stance on China, faster decoupling and risks of further tariffs on non-compliance no matter who controls congress due to a bipartisan commitment to get tough on China. Infrastructure spending will be geared toward transportation and 5G wireless projects, with no spending planned for green energy. A Democratic or split congress, Yeap remarks, will see such policies take longer to roll out vis-a-vis a united Republican congress.
If the Republicans take unified control of congress with a Trump White House in an unlikely “Red Wave”, Yeap explains, deregulation is likely to take place more quickly while Trump’s Tax Cuts -- which expire in 2025 -- will likely be renewed. But if Trump cohabits with a Democtratic congress, regulations are likely to remain at the uneasy status quo while Democrats push back against the tax cuts, which were passed alongside a unified Republican congress.
The elections are unlikely to influence US monetary policy, which is typically apolitical in accordance with the principle of Central Bank independence. But while Biden is likely to accept Fed decisions, Trump has a history of pressuring the Fed and tampering with its autonomy. Considering the convergence between Trump’s economic policy and the Fed’s dovish stance of “lower for longer” rates until 2023, however, the Fed is likely to maintain its “whatever it takes” support for economic growth no matter who wins the White House in November.
According to The Economist, Joe Biden is likely to defeat Donald Trump, with a 85% chance of winning the electoral college with an estimated 330 votes to Trump’s 208. An updating average of 2020 presidential election polls see Biden 7.1 points ahead at 50.2% to Trump’s 43.1%.
