Four years ago, Carl Icahn quietly slipped out of Donald Trump’s raucous presidential election victory party at the New York Hilton. It was 2am, markets were tanking on the shock outcome, and the billionaire investor wanted to take advantage.
Hillary Clinton’s loss to the bombastic property developer had sent US stock market futures tumbling as much as 5 per cent that night, triggering trading curbs designed to damp crashes.
Around the world, investors were scrambling to understand what one of the most sensational upsets in US election history meant for their own markets. But Mr Icahn was so sure that Mr Trump’s presidency would be a boon to the economy that he called his brokers and placed an audacious $1bn bet that the stock market would recover from the fright.
Come morning, the corporate raider had made a fortune, after many investors were mollified by president-elect Trump’s vow later that night to “bind the wounds of division” and unveil a massive infrastructure spending plan, on top of previous promises to cut taxes and roll back regulations.
For the most part, US presidential elections have not proved major events for markets, which tend to handle political uncertainty — especially in stable, developed democracies such as the US — with a mix of indifference and pragmatism. Yet the US stock market’s wild oscillations four years ago underscores how fortunes can be made and lost when Donald Trump is on the ballot.
The Covid-19 pandemic has naturally dominated markets in 2020, overshadowing everything else. Yet investment bank analysts, mutual fund managers and hedge fund traders are now beginning to gauge what November 3’s presidential election will look like, what the winning and losing sectors will be depending on whether Mr Trump or his Democrat rival Joe Biden wins and — uniquely and more worryingly — what would happen if it ends up being a messy, disputed outcome.
In some cases they find themselves asking the sort of questions that are usually in the domain of emerging market investors: what happens to markets if democratic institutions are undermined?
The stakes are unusually high in this contest, given the unorthodox nature of the Trump administration, the increasingly incendiary political rhetoric and a country already on edge over social, economic and racial iniquities and a pandemic death count of more than 186,000.
Although the US stock market has continued to march higher this summer, there are growing signs of nervousness below the surface concerning the coming election, especially over the risk of a contested election result.
“I don’t think it is far-fetched at all,” says Michael Wilson, head of US equities strategy at Morgan Stanley. “Both sides are going to have a case to be made that the results need to be double-checked and counted. It could be contentious . . . I am very concerned about [the threat to] a smooth transition.”
Good moment for markets
Mr Icahn was far from the only investor to benefit from the Trump presidency. While many have quietly admitted personal problems with his administration, it has undoubtedly been positive for financial markets.
The S&P 500 is up around 60 per cent since the 2016 election, despite taking a beating in recent days. Mr Trump’s intermittent trade wars, controversial, norm-shattering style and stumbling response to coronavirus have failed to hold back a stock market propelled by a mix of corporate tax cuts, deregulation, a steady economy until the pandemic and then a massive dose of monetary stimulus from the Federal Reserve.
“Most people didn’t give Trump a chance, and many thought that if Trump won, markets would tank. That was dead wrong,” says Gershon Distenfeld, co-head of fixed income at AllianceBernstein. “Trump wanted to spend, he wanted to reduce regulations and cut taxes. Those are pretty good things traditionally for markets.”
Lately, it has been all about the Fed. The US central bank was already in easing mode, in part because of the economic impact of the US-China trade war that erupted in 2018. But the pandemic spurred it to cut interest rates back to zero and unleash a multitrillion-dollar bond-buying programme. The result was a market rebound that had sent US equities to new highs, before retracing slightly this week.
Mr Trump frequently touts the stock market run as one of his standout achievements, and has recently sought to foment fears that those gains will “disintegrate and disappear” under a Biden administration. But some investors and analysts push back on this narrative.
“The market has come around to the [view] that it is not the end of the world” if Democrats win control of the White House and both chambers of Congress, says Brian Rose, chief economist at UBS Global Wealth Management. “Even though corporate taxes would rise, there is going to be extra spending. This should help to promote growth in the long run.”
However, fiscal support is likely to be curtailed if the Democrats do not also control both houses of Congress. A split Congress could perhaps push through a modest fiscal programme, reckons Wen-Wen Lindroth, a strategist at Fidelity International. In this case, unemployment would decline more gradually than under more aggressive public spending and financial markets would stay buoyant, as interest rates would remain low. “More bluntly: a positive outcome for Wall Street but less beneficial for Main Street,” she says.
Individual industries stand to win and lose depending on the victor. Healthcare stocks may enjoy a boost from broader coverage ushered in by Mr Biden under an expanded Affordable Care Act, but plans to tackle drug pricing could hit the sector. Green energy stocks have also edged higher on favourable polling for Mr Biden.
By contrast, analysts say a Trump win would support traditional energy stocks. His administration has moved to ease regulation on oil companies and last month approved drilling in an Arctic wildlife refuge. Financial stocks may also suffer under a Biden presidency if regulation tightens.
One pressing question facing investors is whether a Democratic victory will lead to enhanced regulation of tech companies. Mr Biden is under pressure from the leftwing of his party to curb Silicon Valley. New rules, or stricter enforcement of antitrust law for tech giants such as Amazon, Apple, Facebook and Google, could temper the soaring run in tech stocks, which have led the market this year. Despite this week’s sell-off, the tech-heavy Nasdaq 100 is still up roughly 30 per cent this year compared with an approximately 5 per cent rise for the S&P 500.
However, Mr Trump has also signalled a willingness to take on the industry, says Alicia Levine, chief market strategist for BNY Mellon Investment Management. “Tech could have a difficult path whoever is in the White House in January — each side has its own reasons to regulate tech,” she adds.
While his first term was generally positive for markets, investors have also expressed fears about how the administration would conduct itself should Mr Trump win again. An “unfettered” President Trump is a concern, says David Kelly, chief global market strategist of JPMorgan Asset Management. “If Trump is elected, given how mercurial he has been in his first term in office, what would he be like if he had no constraints in a second term?” he asks.
The biggest fear gnawing at many investors is a less than clear-cut result. The losing candidate accepting their defeat with grace has long been considered the norm in the US. Yet the level of Democratic distaste for Mr Trump, and the president’s willingness to flaunt custom, has raised the danger that the result could be contested by the losing party — or refused to be accepted entirely.
If Mr Biden loses, it is possible that more demonstrations break out, especially if Mr Trump once again loses the popular vote by a significant margin, or the Democratic vote appears to have been suppressed by the administration complicating postal voting or through polling station intimidation. If Mr Trump loses, his supporters may also take to the streets. Yet many investors are mostly concerned by the risk that the incumbent simply refuses to accept his defeat — perhaps by blaming “illegal” voters, as he has been suggesting without evidence for months.
“That could end up being a real, real issue, and a constitutional crisis,” Mr Distenfeld says. “I don’t know how to handicap that.”
The consequences of this could be far-reaching, given that the US remains the world’s biggest economy, and its currency underpins the global financial system. If investors around the world wake up on the Wednesday after the election and it seems like it will be a while before a winner is determined, “you could see a lot of volatility”, warns Mr Rose.
“If global investors start to have doubts about US policy — either because we can’t declare a winner [in the election] or Trump appoints people to the Fed that are out of the mainstream — the dollar is very vulnerable,” he says. This pressure is all the more heightened given the greenback’s weakness of late.
There are hints that these dangers are beginning to be priced into niche corners of financial markets.
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For example, futures contracts on the Vix volatility index — popularly called Wall Street’s “fear gauge” — that mature around November 3 show an unusual bulge in prices. Although far from pricing in panic, this indicates that investors are betting that it could become a tumultuous time for markets, both before the election and in its aftermath. Derivatives on currencies, government bonds and corporate debt are starting to show the same, according to JPMorgan analysts.
Yet equity markets remain at record highs — a dissonance for many analysts and investors. For Mohamed El-Erian, a senior economic adviser at the insurer Allianz, the stakes of the 2020 election could not be higher — something he frets that markets have yet to fully grapple with.
“A vibrant market-based system depends on the robustness of institutions and the rule of law. They are critical underpinnings,” Mr El-Erian says. “If continuously eroded, as most developing countries find out, an adverse tipping point becomes highly likely.”