As investors wrestle with how to react to a crisis nobody saw coming a couple of months ago, they also have something else to think about which has long been inked into the calendar.
Just as the novel coronavirus outbreak causes havoc in financial markets – to the extent that it led to a 0.5 per cent Federal Reserve rate cut today – the race to become President of the United States from 2021 to 2024 is heating up with ‘Super Tuesday.’
The principle question which could be answered tonight, as a large group of US states vote, is whether the Democrats will choose outsider left-winger Bernie Sanders or centrist establishment figure Joe Biden?
Former New York Mayor Mike Bloomberg is hoping to barge his way into the two horse race, funded by his personal fortune, but that looks unlikely with his campaign being very poorly received so far.
Senator Bernie Sanders speaks to supporters during a campaign rally in St Paul, Minnesota
This matters to investors around the world and not just those in the US, because the American stock market makes up more than half of the global market. It is almost 64 per cent of the MSCI World benchmark index.
There are a couple of ways to interpret the state of play.
One is to see a strong Super Tuesday for Bernie Sanders as an additional worry for the markets, and a Biden or Bloomberg win as a boost.
By American standard’s Sanders’ policy agenda is very far to the left, and stock markets invariably react badly to such politicians gaining power and the prospect of heavy taxation and burdensome regulation.
The caveat to that is the fact the American political system and economy makes it very hard for fundamental change to be pushed through, and the Sanders agenda would likely be significantly tempered down if he took office.
The other way to look at it is to say a Sanders nomination would be good news for investors because it raises the chances of Donald Trump securing a second term, given Americans’ strong historical aversion to leftist politics.
The Trump administration has been unabashed in pushing forward stock market friendly policies, and provided the coronavirus crisis abates, a second term for Trump would likely be well received in the markets.
Kenneth J. Taubes, CIO of US Investment at Amundi commented: ‘A Sanders win of the nomination would be the most challenging outcome for financial markets, as investors are concerned about the cost of his economic agenda. The healthcare sector is sensitive to the prospects of a populist nomination.’
‘A Biden win would be neutral for markets since it would not lead to the implementation of costly policies. In addition, a moderate fiscal expansion with higher infrastructure spending could be positive, but may be offset by a possible expiration of the income tax cuts.’
‘The most favourable outcome would be a Bloomberg victory since his agenda focuses on investment in education and vocational training, higher R&D spending and increased investment in rural broadband access.’
Donald Trump addresses the crowd at a rally in North Carolina, Charlotte
‘From an economic standpoint, the Trump presidency has proved good, with real wages up and tax cuts supporting growth,’ Taubes continued.
‘However, there has been a growing polarisation of US society. Inequality is at its highest level for more than a century as Trump’s policies have mainly benefited the wealthiest. Trump’s proposal consists of a continuation of his policies, including an extension of tax cuts.’
Christopher Smart, head of the Barings Investment Institute is more sceptical on the significance for investors of who wins the race.
‘It’s as stark a choice as we have had in a long time, but the macroeconomic outcomes may not be so different.’
‘Financial markets have turned nasty, an epidemic has us all on edge and we are staring at a crucial vote in a raucous Democratic primary. But even before we get results from Super Tuesday, it’s already clear that the next president will be one of three people: Trump, Sanders or ‘Bloomiden.’
Former Vice President Joe Biden addresses his supporters in Houston, Texas
He added: ‘While each represents dramatically different political philosophies, let alone personal styles, their consequences on the near-term outlook for the U.S. economy may be less than meets the eye.’
‘In fact, whatever the outcome, investors looking to 2021 can expect a further boost from fiscal policy and possibly an even more dovish Fed’.
President Trump has developed a reputation for not being worried about balancing the books and Sanders would be even more free-spending. The issue for investors would be that he would also bring a raft of regulation and changes for US companies.
‘Strip away the politically-charged ‘socialist’ label, which means much less than it seems. Sanders’ breathtaking spending proposals add up, by his own math, to roughly $40 trillion over the next decade, which he mostly pays for in a variety of new or higher taxes on profits, wealth and income,’ Smart continued.
‘His proposals on labor rights, climate and housing alone suggest a large tangle of new rules that will chill corporate investment.’
‘The stark fact remains that any President’s economic policies are only tangentially related to actual economic outcomes in the near term. Not only do they take time to execute, but they are often overwhelmed by a recession in China or an oil price spike.’
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