Trump, Covid And U.S. Election Jitters: How Will Markets React?

The US Presidential election, scheduled for 3 November, was already shaping up to be one of the most controversial ever. Now, as news of Donald Trump’s coronavirus diagnosis sinks in, a new level of uncertainty has been added to the mix. So how are markets responding on both sides of the pond?

When Donald Trump announced that he, along with his wife Melania, had become victims of Covid-19, stock markets were shaken. US indices – such as the S&P and Dow Jones –  were hit, slipping almost 1% when they opened after the news broke via the President’s twitter account.

Russ Mould, investment director at stockbroker AJ Bell, said: “Donald Trump catching coronavirus put the markets in a mild state of disarray.

“First, the President of the United States becoming ill creates a sense of instability for markets in general. Second, it raises the question of how the Presidential election will play out – has Joe Biden also been affected, will Trump be well enough to continue the debating while self-isolating, and will the elections be postponed?”

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It’s a clear sign how big an impact the US Presidency and the coming election on 3 November has on markets and, ultimately, your own investments. After all, as the saying goes, when America sneezes, the UK catches a cold.

Rupert Thompson, chief investment officer at wealth management firm Kingswood, said: “The news that Donald Trump tested positive for Covid means the US election looks even more certain to be a source of volatility for markets over the next month or two.”

The televised Presidential debate earlier in the week had appeared to some commentators to move the odds in Presidential-hopeful Joe Biden’s favour. But the wild-card of the inevitable increased focus on Covid could go either way, Mr Thompson said: “It should work in Biden’s favour, but Trump could benefit from a sympathy vote,” he said.

The news may also impact the wider economy, with Covid sceptics turning more economically cautious in their behaviour, slowing the recovery.

Market navigating ‘choppy waters’

“It was already looking as if markets had entered choppy waters and the latest development just means the waves could be a little larger,” said Mr Thompson.

The 2020 US election had already been shaping up to be an unusual one, but the course of Mr Trump’s recovery will clearly affect the remaining weeks of the campaign and investors’ response to his diagnosis.

“Over the coming weeks, the anxiety around the US election will no doubt intensify,” said Nicolas Janvier, head of US equities, EMEA at Columbia Threadneedle Investments. “However, changes in presidential administrations rarely lead to fundamental changes in how the US economy works. Therefore they tend to have limited impact in the longer term on financial markets.”

US options markets – which effectively bet on what may happen in the future – are currently pricing-in increased market volatility, which suggests investors might be expecting a lack of clarity on the timing of a declared Presidential winner.

Highs and lows

So how do mainstream investors avoid such high-risk short-term issues, and how best can they ride out the market highs and lows that could emerge over the next few weeks?

“It will be important for investors to recognise that, although volatility and uncertainty will be high both in the run-up to and after the election, the economy and the market markets will move past this,” said Mr Janvier. “Investors will benefit most from a focus on US companies with strong long-term business models.”

AJ Bell’s Russ Mould said markets could suffer in the same way they did in 20 years ago if the result of the election is contested or otherwise remains unresolved: “President Trump’s combative stance on postal voting and his cry that he could contest the election result bring back bad memories of the 2000 election.”

That year, George W Bush and Al Gore battled over a recount in the state of Florida, arguing over so-called ‘hanging chads’ on votes, and they eventually had to go to the US Supreme Court to settle the matter.

By the time the dust had settled, the S&P 500 index of US shares had lost 12% of its value, although it bounced back to recover about half of that by the time Bush was sworn in.

Candidates’ economic policies

The two US Presidential candidates have differing economic policies, as you’d expect. In fact, they couldn’t be much more different.

“On paper, Trump seems likely to favour more tax cuts and more deregulation, a recipe which investors in US equities have welcomed since his victory in 2016, despite all of their initial misgivings at the time of his defeat of Hillary Clinton and ongoing concerns over his trade policies and strained relations between Washington and Beijing,” said Mr Mould.

“By contrast, Biden seems likely to favour tax hikes and moves toward wealth distribution and tighter regulation. Oils, banks and technology are all stock market sectors which may be viewed with caution in this context, although aggressive spending on infrastructure and renewable energy mean there could be some interesting market hotspots.”

However, long-term US watchers know that policies can change after Presidents get elected.

“Candidates traverse the country making promises and shouting why the other candidate’s election will result in the death of the nation,” said Greg Padilla from Aristotle, which manages the St. James’s Place North American fund. “But in reality, very few of those promises ever becomes law, and the nation continues on.”

What remains to be seen is whether this year – one where the plot twists just keep on coming – will show a similar pattern to previous times.

Election promises – why they’re sometimes not kept

One of the realities of American politics is that a President needs support from the Senate – the US upper parliamentary chamber – to push through legislation and fulfil election promises. And that doesn’t always emerge, as Barack Obama discovered to his chagrin.

A Biden Presidential victory could lead to the same problems, with him failing to get support of the Senate, which would limit the amount of legislation he could push through.

For instance, there’s still been no agreement on the financial support bill which the Republicans would prefer to keep at $2 trillion, while the Democrats want $3 trillion.

“An inability to find a compromise before the election would reflect badly on both sides, so something in the middle is likely to be found,” said Marcus Brookes, chief investment officer at Schroders Personal Wealth.

“That should provide a short boost to sentiment and spending in the US which is very timely because the recovery in the jobs market appears to be grinding to a halt. A boost for the US economy has positive ramifications for global expectations, including those of UK investors.”

What if Biden wins?

“If Senator Biden were to win complete control, including a Senate majority, then we would not be surprised to see him reward his voters,” said Schroders’ Marcus Brookes, meaning more social welfare spending, higher levels of government borrowing and the potential for a greater emphasis on wealth transfer: in short, tax the rich and give to the poor.

“Perhaps of greatest significance for UK investors would be the heightened level of government borrowing,” said Mr Brookes. “While providing a short-term boost to borrowing, spending and economic growth, from which UK investors could benefit indirectly through higher global share prices, there could be some negative longer-term implications.”

For starters it would expand the debt burden that the US government is having to maintain, which would mean there would be less to spend on hospitals, roads and financial support.

Also, more government borrowing means more US government bonds being issued. And bonds can form an important part of an investment portfolio, Mr Brookes points out.

“Our focus in this time of considerable uncertainty is to develop a mix of stocks and bonds. Combine that with a sensible long-term horizon – we focus on 10-years – and the investor has a fighting chance of not being derailed by the relatively short-term turbulence created by political machinations.”

Abiding uncertainty

AJ Bell’s Russ Mould is blunt in his prediction of what may happen in the US election: “No-one has a clue who will win, no-one knows if the result will even be available or accepted, and no one knows how markets will react in the event of a Biden or Trump victory.”

He pointed out that the consensus view before the 2016 US election was that Trump would be ‘bad’ for markets, because of his policies on trade in particular. “That view proved to be spectacularly wrong.”

So with such uncertainty ahead, doing nothing could be the best option for UK investors.

“If nothing else such a tactic avoids commissions, fees, spreads, dealing costs and possibly currency charges for overseas investors and maybe even taxes, for good measure,” said Mr Mould.

That view is echoed by Simon Cahill, partner at Octopus Wealth: “Well-advised and prepared UK investors should not change their strategy simply based on the election alone,” he said.

“If we look back to the Trump election in 2016, all the commentators at the time were saying that Trump would never get in, and if he did, markets would fall off a cliff. They didn’t. In fact they actually went the opposite way.”

Mr Cahill reckons investors should consider equities as a long term investment. “Short term fluctuations and market noise should not detract them from their overall strategy,” he said. “The reality is that with the upcoming election, markets may rise, markets may fall, or markets may stay as they are.”

He added: “If anyone tells you that they know what will happen to the markets in absolute terms, start running. They don’t.”