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U.S. election: Macroeconomic and financial market consequences

Kevin Loane
Kevin Loane
Head of Fathom USA, Fathom Consulting

This is a guest blog, provided by Fathom Consulting, a trusted Refinitiv partner.

Fathom Consulting has already outlined the state of the race to be U.S. president in a previous blog, concluding that Joe Biden should be considered the favorite. We now turn to the macroeconomic and financial market consequences of the U.S. election.

There are a range of possible outcomes, including different permutations in the House and Senate.

Overall, we judge that a Biden win would be consistent with increased fiscal support, and higher GDP growth (real and nominal), despite an anticipated increase in taxes.

By contrast, any Trump victory is unlikely to come with Republican control of the House and would be associated with reduced fiscal measures.

Foreign policy would be the area to watch during a second Trump administration.

If Joe Biden wins November’s presidential election, there is a reasonable chance that the Democrats will keep the House and take the Senate.

Under this scenario, we would expect further fiscal support to be the administration’s number one priority.

Reports suggest that advisors are pushing for an immediate $1 trillion support package.

Meanwhile, Biden’s policy platform will require a big increase in spending that is only partly offset by fresh taxes on corporations and high earners.

The overall impact would be a large net fiscal stimulus versus the counterfactual, with associated upwards pressure on GDP growth (real and nominal) as well as higher budget deficits, with some upside risk to inflation and interest rates.

President Trump has surprised before. It would be foolish to rule him out.

However, his path to 270 votes in the U.S. Electoral College (the number required to win) is tight, and if national polls remain where they are, it seems unlikely that Republicans will be able to win a majority of seats in the House.

As a result, our baseline expectation is that a Trump second term would be hamstrung by House Democrats, and any prospective fiscal support would be comparatively small.

In this scenario, a second-term Trump administration would have its biggest impact on foreign policy.

Sino-U.S. tensions have already increased sharply. Without the need to win another election, it seems possible that President Trump could take a more confrontational approach to Beijing.

Evidence suggests that financial markets tend to react ahead of elections.

Wins by the incumbent are associated with a rising stock market and easing dollar before election day, according to data from presidential races dating back to 1992. By contrast, incumbent losses tend to be preceded by a falling stock market and a rising dollar.

This finding is intuitive. Periods of U.S. economic weakness, such as 2008, tend to be ‘risk-off’, explaining the stronger dollar and falling equity markets.

However, this trend may also reflect investors pricing in uncertainty about the new administration.

If it is the latter, and Joe Biden maintains his strong lead in the polls, there is reason to expect some fading in the S&P 500 and a rise in the U.S. dollar over the coming month.


For a comprehensive overview on our election coverage, including updates on the Global Markets Forum, webinars, data insights and more follow our U.S. Election page.

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