The outcome of the US election from a market perspective is practically all about the prospects for more fiscal stimulus; clarity of the outcome is crucial. The weighted average outcome of scenarios I-III looks positive. But the dark horse of a contested election represents a significant risk.
I.A clean-sweep for the Democrats (DEMs), winning both the White House, the Senate and the House of Rep. Probability assessment: 50%. •Reduced political uncertainty and greater chance of a systematic COVID-19 response, avoiding a double-dip recession in 2021. •Wall Street dislikes, such as tax hikes, likely take a back-seat in the short run. •DEM control of both WH and US Congress offers maximum clarity from a policy perspective. •By far the best outcome for Wall Street in the short run.
II. A Democrat victory where the DEMs fail to flip the Senate. Probability assessment: 25%. •Crucial races to follow appear to be Iowa and North Carolina. •Incumbent Republican senators, set to lose their seats in previous polls, are gaining ground. Both states look like a toss-up at present. •If DEMs can only flip two senate seats on Nov 3rd, GOP will retain control over the Senate, making a large stimulus package illusive. •A clearly negative outcome for Wall Street. In the words of Fed Chair Powel (Oct 6th): “Too little stimulus is worse than too much”.
III. A Republican victory where the GOP fails to flip the House. Probability assessment: 25% (vs. 36% based on betting odds). •The equivalent of a ‘hung parliament’ •Wall Street has shown no dislike for Trump, even when the GOP lost the House. •A wait-and-see scenario, but likely with a positive tilt.
IV.A contested election result. Probability assessment: 30% ● •We include in our 25% probability of a Trump victory the outcome that the Supreme Court (SC) will have to pick a winner. •Given that the GOP has occupied the available 9th seat, the SC looks likely to come down on the side of supporting Trump in that case. •In the worst case, a constitutional crisis could follow. A clearly negative scenario, especially in the short term.