Chief Economist of MAPFRE Inversión
The result of the American elections suggests that it will take days or possibly weeks to determine the final balance of power, and it could even drag on until the beginning of 2021. In practice, such a tight result leads to the economic forecasts of the new government being shifted away from the more extreme proposals by the more moderate wings of each party. In the area of investment, the expected policies can be summarized in two aspects: whether or not a strong fiscal stimulus is going to be implemented in the coming year and what measures can alter the relative attractiveness of the stock market sectors.
Regarding the first, doubts persist because the situation points to the possibility of being blocked by either of the two parties, just like what happened a few weeks ago. However, and although the proposed stimuli differ in part in their technical aspects, both parties support them. Furthermore, the political incentive to block a package is very low, in that there are no upcoming elections and related risk that voters may react negatively. Therefore, a fiscal stimulus is very likely, perhaps more powerful if Trump prevails due to the characteristics of his proposals, but the final impact of which on the market is reduced. We may see volatility as details are hammered out, but the factors driving assets the most today are monetary policy and the persistence of the pandemic, with the impact of an eventual fiscal stimulus on these being low.
Regarding the second aspect, the differences between the two can be articulated in three points: taxes, regulation and climate-related activity. Trump’s proposals envision tax cuts and deregulation. Biden intends to do the opposite, in addition to focusing much of the support on companies that are committed to going green. The aggregate profitability of business activity, and therefore of investment, would appear to be higher under the Republican formula. The Democratic plan would possibly favor the public purse, in exchange for limiting the positive impact of an eventual fiscal stimulus, since it would be offset in the form of higher taxes. In any case, again, these are marginal effects. The financial markets expect the establishment of a new executive in January and when this happens they will probably shift their focus to something else.
When it comes to lasting changes in the perception of investors, there are hardly any differences between the possible government options. They diverge more in other social, ideological and conceptual aspects. And although in the long-term the different visions of both will skew the future, the negligible difference in the electoral result does not give either one room to apply extreme economic agendas, which in turn points to policies based on continuity. As such, and in conclusion, we are in for a noisy and volatile ride in the weeks ahead, but the reality of the long-term markets depends more on other issues, such as Ant’s failed IPO, which can more permanently reconfigure the global economic landscape.