It ain't over til it's over!
US election update
After what feels like an eternity, the end of the US election campaign is finally in sight. That is, if the loser accepts the election result. But if this campaign and Brexit have taught us anything, it's that Yogi Berra was right: 'it ain't over til it's over'. I have a feeling I will not get much sleep next Tuesday night.
Even before the latest chapter of Hillary Clinton’s email investigation, the race had been tightening. In FiveThirtyEight’s poll-based forecast Hillary Clinton’s odds of winning peaked at 88%, just before the third and final debate, and had been gradually declining to 81% by last Friday when the FBI news hit. Since then her odds have declined further, and are currently 74%. It will take a few more days before we have enough polls to understand better the impact of this latest twist.
But what now seems (relatively) clear is that the race will be too close to feel confident in a specific outcome when the polls open on 8 November; for many reasons.
It’s important to remember that Brexit odds were at 24% when the EU referendum polls opened on 23 June and fell as low as 11% when the polls closed. This puts Trump’s odds of roughly one in four into perspective…stranger things have happened.
The recent tightening of the race also takes the gap between the candidates into a territory where systematic errors in polls could be large enough to deliver a surprise on election day. In ‘Could events in rural Germany foretell US election results?’ we flagged the risk of 'Shy Trumpists' and of unexpectedly high turnout amongst Trump’s key demographic of non-college-educated white men, as we have seen in some recent German elections.
Not to mention that with almost a week to go there seems ample room for yet another twist in this unpredictable election campaign. Wikileaks or another Clinton health scare are both events that could swing probabilities at this late stage.
Putting the political dramatics aside, as investors, our real focus is on how different election outcomes could move asset prices on 9 November and thereafter.
There are three main scenarios:
- Hillary Clinton wins but has to govern without a majority in Congress
- A Democrat Sweep where they control White House, Senate and the House of Representatives, and (of course)
- Donald Trump moves into the White House.
The first scenario could have the smallest market impact, partly because it is the most likely outcome and thus largely priced in, but also because it represents the status quo and would create little additional policy uncertainty.
A Democratic Sweep is the least likely outcome based on bookmaker pricing. This would allow Democrats to pass a far greater part of their legislative agenda. It would suggest some fiscal stimulus, tougher financial sector regulation, higher minimum wages and greater pressure on drug prices. The impact on growth assets could be limited, though likely somewhat negative. We would expect some upward pressure on yields as the risk-off case of Trump winning is priced out and from greater inflationary pressures and tighter Fed policy.
A Trump win would likely deliver the greatest market impact. Market moves in response to changes in Trump’s odds around the first debate and last week’s FBI story suggest a significant risk-off reaction with a hit to growth-sensitive assets. We would expect earnings to benefit from a Trump fiscal stimulus but this to be more than offset by a lower PE on the basis of significantly higher uncertainty. The fixed income reaction is less straightforward. Many of Trump’s policies could be inflationary (e.g. anti trade, anti immigration, fiscal stimulus) but in the short term, risk-off sentiment would likely prevail and push bond yields lower.