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How the New US President Will Affect the World Stock Market

Uploaded Date 30-Oct-20
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If you’re planning on investing or currently invested some of your money in the stock market, you may be browsing through stock tips. One of the most common share market tips is to always keep yourself updated when it comes to global news. The US national elections are coming. Every country in the world is on the watch on who’s leading the polls. Now more than ever, the US elections will shape the world.


Who decides who will win?


How Americans vote for their president highly differs from many countries all over the world, especially India. In the United States, they do it using the Electoral College. The two main figures in the upcoming election are current US President Donald Trump and Joe Biden. However, if you take a look at the ballots, you won’t exactly see these two names next to a checkbox. Instead, you will see a ton of different names you probably haven’t heard of before - especially if you don’t like it in the US.


When Americans vote, they are voting for electors, hence the Electoral College. It is these electors’ votes that actually determine who wins as president. So how does this work exactly?


The Electoral College


The United States of America is divided into 538 electoral votes. Each state is given a portion of the electoral votes depending on how many legislators the state has in Congress. So in general, a state is given a certain number of electors depending on its population, not exactly the actual size of the state.


For example, the highest populated state is California. They get 55 electoral votes. As opposed to a bigger state (by land) like Texas, which only has 38 votes. Alaska, although the largest US state by land, only gets 3 electoral votes. Lesser populated states like North Dakota and Montana also only get 3 votes each.


Citizens of a state vote for a political party. Whichever party gets the most votes gets to cast their ballots. Thus, it follows a winner-takes-all concept. For example, if in California, Democrats get 53% while Republicans get 47%, only Republican electors get to vote for the president. Thus, Republicans get to use the 55 electoral votes no matter how close the voting was.


A president must get at least 270 electoral votes out of the 538. You can see how winning in the highly populated states is a lot more important than individual votes. It certainly is not a popularity contest where whoever gets the most votes wins. What matters is where they get the votes.


Who is on the lead?


In the anticipation of who will win the US presidential election this year, many are curious to know who is on the lead. Surprisingly, even polls are able to affect the global stock market. Even when the votes have not been cast yet, polls are already affecting not just the US markets but also other countries as well.


Based on the 10-day average for national voting intention poll this, it seems that Joe Biden is currently leading as we approach the 2020 presidential election. But let’s not forget how Hillary Clinton won the polls but ended up losing in the electoral college.


Based on the Guardian, Biden is leading in the following states: Florida, Pennsylvania, Wisconsin, Arizona, among others. Meanwhile, Trump is leading in Ohio, Texas, Kansas, among others.


If Biden should win, he must win the three states that Trump won in when he was elected back in 2016. This includes the big Rust Belt states: Pennsylvania, Wisconsin, and Michigan. He must also win Florida, and at least one of the other 3 Sun Belt States of Arizona - Arizona and North Carolina.


Maria Paola Toschi once said that since 1932, an incumbent US president has never failed to win re-election unless there was a recession during his or her time.


Trump vs. Biden


The S&P 500 Index hit an all-time high last August 2020. However, the US presidential election on November 3rd of this year will soon certainly test the markets. JPMorgan Chase & Co. strategist says that a win for Trump and the Republican party could actually push the S&P 500 index by 13%. Conversely, a Democrat victory would just have a neutral effect.


What happens if Trump wins?


Victory for Donald Trump provides a degree of certainty when it comes to existing policies. We most likely know what to expect if Trump continues with his presidency. One of the main things to expect is a tight regulation with China concerning trade. There is also a concern with regard to immigration laws.


A market strategist at LPL Financial also said that a reelection would be more beneficial for the market. This is because a reelection is preferred. In the re-elections of Reagan, Clinton, and Obama, the stocks saw almost 30% gain. However, there is also the question of whether or not this will apply this 2020.


What happens if Biden wins?


Joe Biden winning the presidential race coupled with the Democrats controlling the Congress would mean an increase in corporate taxes and changes in policies. This is a reversal of the tax cuts previously initiated by Trump.


Investors tend not to be fond of Democratic presidents as this poses a high likelihood of policies that might not be too favorable for businesses. This includes an increase in taxes and regulations which overall impact investors’ profitability.


Donald Trump has previously stated what if Joe Biden wins the presidency, it would mean a crash for the stock market. However, financial experts have already emphasized that there is zero evidence that will back this claim.


We should also look into what happens if Biden wins but Trump won’t concede. This premise isn’t truly foreign as Trump has previously stated that mail-in voting in this pandemic is highly subject to fraud. This, among many other things, will affect the investors’ confidence and decisions.


Who is the better president for the financial market?


Unfortunately, there is not a clear-cut answer as to which president would be more beneficial to the financial market. The first answer that would come to mind is that a Republican president would be better for the market. However, that’s not totally correct. If it’s not a Republican president, then it must be the other option - the Democrat president. But that’s not completely right either.


Based on the data gathered by DatastreamRefinitiv, Robert Shiller Dataset, and Schroders, higher stock market returns were seen in Democratic Presidents. The average S&P 500 returns from 1933 up to 2019 for a Democratic President is 10.2%. It is significantly higher than the 6.9% seen by Republican Presidents over the years.


However, in regards to Asian markets, strategists say that a victory for Trump would be advantageous for India. India’s position in the markets will be strengthened to counterbalance China’s dominance.


This is simply one in a sea of factors that will dictate who’s the better-suited president for the financial market. Take note that past performance is not a guaranteed reflection of future returns. However, if you exclude Bill Clinton’s robust economic growth and the financial crisis under George W. Bush’s, there is almost no difference between the market returns among Democratic and Republican presidents.


How will the election affect the Indian market?


In the grand scheme of things, there isn’t a clear-cut superior choice for a US president for the global market. However, if we will be talking about the Indian market, it’s certainly worth noting how things will go whoever gets elected.


Different scenarios could play once either of the presidents gets elected. Based on financial experts and analysts’ opinions, India will still win no matter who wins the presidential race. It’s almost a win-win situation for India. There will be major benefits no matter who gets elected.


Concerning the Indian market, the policies regarding trade are of higher importance. Many experts are saying that Indian markets will win regardless of who wins the presidential race this 2020, so that is something to look forward to. A strategist also said that there is no clear bias for any party when it comes to the stock market. Moreover, the low-interest policy of the Federal Reserve still remains whoever emerges victoriously from this year’s election.


Conclusion


By now, you are probably looking for stock options tips and other advice concerning the stability of the Indian market following the US election on November 3rd. However, it’s important to not get caught up in the political race. For the most part, the Indian market won’t be affected by whoever wins the election. Essentially, there simply isn’t a clear better choice for a US president when it comes to the Indian market.


Shyam Advisory: The main consensus is to not be too bothered by the US elections’ effect on the Indian market performance. There is zero evidence that any dip in the market will occur whoever wins the 2020 election.