The economic impact of US presidential elections

How does the US political system work?

Before we assess each candidates’ policies for the forthcoming US presidential election and the effect that they might have on the economy, it’s important to run through how the US political system works, because a president is not solely responsible for determining economic policy.

The US has a bicameral political system, made up of the House of Representatives and the Senate – collectively known as the US Congress. House members serve for two years and there are 435 seats available – with all seats up for contestation every two years.

Senators serve for six years, and there are 100 seats available. Roughly one-third of the seats in the Senate are up for election every two years. There is currently no limit to how many terms a member of the House or Senate can serve.

These two institutions represent the legislative branch of government, and they’re responsible for drafting, debating and ultimately voting to approve or reject laws. The president on the other hand, represents the executive branch of government – which is responsible for enforcing the laws of the Federal Government.

The separation of these two branches of government is an integral part of the separation of powers in US politics.

For reference, the third and final branch of the US government is the judiciary, which is responsible for interpreting the laws. The judiciary holds huge sway in American politics – especially the Supreme Court. This is particularly true for controversial issues in the US like abortion (Roe vs Wade 1973), gun control legislation (District of Columbia vs Heller 2008) and social equality (Bostock vs Clayton County 2020).

Usually, a single party – Democrat or Republican – will control a majority of the seats in either the House or the Senate. Some years, one party can control both. This is where it gets tricky for presidents, because a Democratic president can find themselves confronted by a Republican-controlled legislature, or vice versa for a Republican president. This scenario greatly reduces a president’s ability to get their legislative proposals and promises that they made on the campaign trail approved.

How the different candidates’ policies might influence the economy and markets

Now that we’ve established how the political system in the US works, it’s important to state that a presidential candidate’s promises on the campaign trail might be harder to implement than first thought.

So, it’s worth remembering that while the policies proposed by each candidate at the moment might affect the economy in one way or another, these policies are not certain to be approved. That said, we’ve outlined some of the candidates’ main policy proposals below.

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Donald Trump’s policies

US President Donald Trump’s policies are what many political and economic analysts would call protectionist – which is a political attitude that seeks to shield domestic industries from foreign competition, often by placing tariffs on imports.

In this respect, Trump’s policies have been characterised by his ‘America First’ strategy, which puts American manufacturers and producers at the forefront while imposing higher tariffs on foreign companies.

With that in mind, here are some of the incumbent’s policies for this election cycle:

• Create ten million new jobs in ten months
• Create one million new small businesses
• Cut taxes to boost take-home pay and keep jobs in America
• Enact fair trade deals that protect American jobs
• Tax breaks for products that are made in America
• Bring back one million manufacturing jobs from China
• No federal contracts will be granted to companies that outsource to China
• Cut prescription drug prices
• Provide school choice to every child in America and teach American exceptionalism in schools
• Pass legislation to implement Congressional term limits

It’s not unfair to say that Trump’s policies are geared towards the economy, American manufacturers and Wall Street – which could mean that markets will rise if the incumbent remains in office.

Under Trump the Dow, S&P 500 and Nasdaq have all achieved record peaks, while unemployment fell to its lowest point in almost 50 years – dropping to 3.5% in January 2020. This feeds into the current administration’s tendency to champion Trump as a ‘jobs president’.

Joe Biden’s policies

Joe Biden is the Democratic candidate, and the party’s platform this year has been partially shaped by progressives such as Bernie Sanders. Biden has had to expand his platform to attract these voters, and his expansive list of policy proposals is evidence for that.

His platform is catch-all, and it encapsulates many of the problems currently facing America – from gun reform and the opioid epidemic to the environment.

With that in mind, here are some of the policy proposals from the Democratic contender:

• Ensuring that no one would pay more than 8.5% of their net income for health insurance
• Committing to raising the minimum wage in America to $15 an hour
• Ban the manufacture and sale of assault weapons and high-capacity magazines, and buy back those already in circulation
• Combat the opioid epidemic by making effective prevention, treatment and recovery services available to all through a $125 billion federal investment
• Create one million new jobs in the American auto industry
• Spur the construction of 1.5 million sustainable homes and housing units
• Increase corporation tax to 28% from the current level of 21%
• Raise taxes for anyone earning over $400,000 a year, plus issue a commitment that those who earn less than $400,000 will pay no new taxes, which applies to roughly 91% of Americans
• Launch a national effort aimed at creating the jobs needed to build a modern, sustainable energy infrastructure and deliver an equitable clean energy future with a $2 trillion investment
• Achieving net-zero emissions for the entire US by no later than 2050

Biden’s policies are geared towards human needs like committing to a $15 minimum wage and investing in America’s infrastructure, while also increasing taxes for those at the top. So, markets might look less favourably on a Biden presidency than a Trump presidency, but the outcome remains to be seen.

Current estimates are that Biden’s complete tax package will raise between $3.5 trillion and $4 trillion over the course of ten years.

The economic impact of the election

Historically speaking, election years have provided a boost to the US economy, but due to the Covid-19 pandemic and subsequent economic shutdown, this year is slightly different to the norm.

At the time of writing (24 September 2020) Biden was the preferred candidate, which means that the balance could tip away from the incumbent reassuming office.

The markets will likely be uncertain as a result. Plus, as Biden is a Democrat and given his tax plans, it’s likely that there will be an increased anthropocentric approach to economics – meaning a greater focus on human needs – rather than the business-focused approach of the current administration.

Markets might look unsatisfactorily on this, especially after four years of Trump’s fiscal friendship with corporate elites and Wall Street.

Learn more about the US election and what it means for markets

US elections and volatility

US elections usually cause increased market volatility, especially if the outcome is uncertain. Heading into November 2020, Biden is the leading candidate in a number of national opinion polls. But keep in mind that markets also favour the re-election of the incumbent, so Biden’s election could cause wider market volatility rather than stability.

That said, opinions can change quickly. Betting odds on 2 September 2020 had Biden on 50 points and Trump on 49.5. But, just a month earlier, Biden held a lead of 60.7 to Trump’s 36.7. Slightly over a week later, on 11 September 2020, Biden had etched back up to 53 against Trump’s 46.2.

The VIX had been heading steadily downwards since May 2020, but it began to spike up towards the end of August and early September. This is a possible indicator that the markets are jittery around a clear-cut election result in November, and the prospects of a Biden victory.

Learn more about trading the VIX

How will markets react to the US election?

Below, we’ve outlined how the US presidential election could impact the strength of USD, the value of US stocks and the price of gold.

USD

The US dollar could weaken on the back of a Biden victory, because he’s widely seen as being less focused on the markets than Trump. But, if key markets fall on a Biden victory, USD might actually rally in the short term as investors turn to USD and its haven status.

Stocks

A Biden victory could cause market uncertainty to increase, especially since Trump has geared his policies towards the stock market and job creation. The incumbent will often tweet when the Dow or another key US index passes a major milestone, helping to increase his reputation as a ‘jobs president’. But Biden’s policies on the environment, public services and infrastructure could see shares like renewables, industrials and materials rise.

Gold

If Biden wins, gold could increase in price given his tax policy and the possible stimulus that this could provide to the US economy. Biden’s fiscal policy, which is geared towards greater debt, could also provide a boost to precious metals as investors turn to gold as a haven in which to store their capital until markets become more certain.

How to trade the US election

To trade the US election with us, follow these steps:

1. Research the market you want to trade
2. Keep track of opinion polls for the predicted winner
3. Create a trading account
4. Choose whether to go long or short
5. Open and monitor your position

You can trade the US election by using financial derivatives like CFDs. These enable you to speculate on prices of rising and falling markets – so CFDs are well-suited to increased volatility and market instability that the US election could cause.

We offer a wide selection of markets, ranging from USD forex pairs, commodities – including gold and oil – and US indices, such as the Dow (Wall Street), the S&P 500 (US 500) and the Nasdaq (US Tech 100).

US elections summed up

• The US presidential election is taking place on 3 November 2020 – as are elections to the House of Representatives and the Senate
• Some polls put Joe Biden in the White House, but the result is causing market instability, and bookmakers have slashed their odds on his supposed victory
• Uncertainty around the eventual winner will likely cause greater market volatility and USD, gold and the Dow will all be affected in some way
• Trade the volatility on these and a range of other markets by opening an account with us