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A matter of majorities: US election: three scenarios and how they affect the stock market | message


by Max Holzer, guest author of Euro am Sonntag

A.The Democratic challenger Joe Biden is currently ahead of the incumbent president in election polls Donald Trump. The fact that Trump tested positive for the corona virus at the beginning of October also speaks more in favor of Biden, because the President has always downplayed the threat posed by the pandemic. But Biden’s victory is by no means certain. If the election result is tight, there is also the short-term risk of an election being challenged. Trump has repeatedly questioned the legitimacy of a corona-related high percentage of postal votes.

Whatever the name of the new president, the two election programs overlap. Both opponents emphasize US interests in economic policy. US trade and technology policy towards China, for example, will not fundamentally change. Biden, however, should be more moderate. However, it is not the President and his party alone who decide on the implementation of the individual points in the respective election program; that depends mainly on the electoral arithmetic in parliament. Whether a US president rules with a united or split parliament has a major impact on the government’s room for maneuver – and thus also on the stock market.

Promotion of innovation and more infrastructure spending

Scenario 1: Biden wins with a democratic parliamentary majority.

On November 3rd, parts of parliament will also be re-elected. The Democrats could therefore provide the President and also achieve a majority in Congress, which would be a so-called “democratic sweep”. The majority of Democrats in the House of Representatives (large chamber) currently seem to be well established. In the Senate elections (small chamber), a victory for the Democrats is only likely in combination with an election victory for Joe Biden.

What would the “democratic sweep” mean for the stock market? Since the Democrats are planning tougher environmental, health and social standards, Biden’s election victory and a “democratic sweep” will probably initially weigh on share prices. In the long term, however, the stock market could benefit from the higher growth potential of the US economy as a result of the promotion of innovation and more infrastructure spending – under President Trump, the backlog of roads, bridges and water supply had massively increased – as well as from wage increases that boost consumption. Companies from the fields of renewable energies, environmentally friendly technologies and infrastructure should get a tailwind. Also, under President Biden, trade rhetoric should be less harsh and US foreign policy more diplomatic.

Scenario 2: Biden’s victory without a majority in Congress (Biden Split).

Similar to Trump, a President Biden in this constellation would rule primarily through the enactment of “Executive Orders” – implementing regulations – since a blockade of his legislative initiatives by a Republican Senate is likely. Since the congress is responsible for revenue and expenditure, its planned investment packages and the hoped-for growth impulse of its economic agenda are likely to be partially invalid. On the global stage, more cooperation with alliance states and less harsh rhetoric would continue to apply.

On the other hand, the less Joe Biden can raise taxes in the difficult economic situation, the greater the positive effect of the relaxation of trading rhetoric on stocks should be. Overall, this scenario is arguably the most favorable for the stock market.

At the global level, the unpredictability would persist

Scenario 3: Re-election of Trump and a split parliament (Trump Split).

The existing political divide will continue. A smaller infrastructure package geared towards traditional industries and tax cuts for the middle class appear possible. There would be more deregulation in the energy and financial sectors. At the global level, the unpredictability would persist.

There could be a short-term relief rally on the stock market if stricter regulations do not materialize. In the medium to longer term, however, the premiums for risky assets are likely to rise, as the economy is not modernized and growth remains weak.

Max Holzer
Head of Relative Return at Union Investment

Holzer has headed the Relative Return department in Union Investment’s portfolio management within the newly established Multi Asset division since 2017. Before that, he headed the Asset Allocation unit from 2004 to 2016. Union Investment is the fund company of the Volks- und Raiffeisenbanken. With assets currently under management of around 370 billion euros, it is one of the largest German asset managers for private and institutional investors.


Image sources: Union Investment, razihusin /

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