The name “Donald Trump” has become inescapable for many of us, even all the way on the other side of the world, and his highly controversial four years as president so far is coming to a head in next month's US presidential election.
If you’re not someone who follows global politics super-closely, you might be wondering just why the US election between Donald Trump and Joe Biden, scheduled to take place on November 3 (November 4 our time) seems to be plastered all across our TV screens recently, even more so than our own politicians are.
Dubbed “the most important election” since various points in time (in history, since WWII, in our lifetimes) by each candidate at various points, the upcoming US election has significant implications not just for the United States, but here in Australia as well. And while many of the major changes that come with a US election won’t directly impact us, this US election, like so many others, still has the potential to affect Australians and their money in various ways.
In this article, we’ll explore the likely outcome of the US election and how it can affect our finances down under.
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On this page:
Who’s going to win?
What effect will this have on the US economy?
How does the US election affect Australia?
What impact will a Biden win have?
What impact will a Trump win have?
What impact will a contested election have?
Who’s going to win? Trump or Biden?
Although there’s never a certainty as to who will win an election, things aren’t looking good for Trump, and they are looking good for Joe. Highly reputable polling aggregator FiveThirtyEight at the time of writing (21 October 2020) has Joe Biden favoured to win the election at 87% to 13% for Trump, a difference that has been steadily increasing over the last few weeks and months.
Real Clear Politics Betting Odds meanwhile has shown a sharp increase towards Biden lately, and he is now favoured to win the election by 61.8% to 38.5%.
Source: Real Clear Politics
Now you might be thinking: Weren’t the polls wrong in 2016? Well, only to a small extent. While Trump’s victory then was still an upset, the polls were much closer back then compared to now. Hillary Clinton, a famously unpopular candidate, was 3.2 percentage points above Trump in the national polls - almost within the margin of error - and only had minor leads in key swing states that Trump subsequently won. Biden, on the other hand, has a massive 12+ point national lead and has substantial leads in the key swing states required to win. The polls weren’t necessarily wrong last time, but the media was.
Trump, who won last time as ‘political outsider’, now faces a decidedly mixed record as an incumbent. He is generally poorly regarded by voters when it comes to issues like national unity, foreign policy and law enforcement, according to Pew research, while his response to the coronavirus which has left over 200,000 Americans dead has been derided, with polls showing voters think Biden would do a better job by 17 percentage points.
With the US economy in tatters in the wake of the virus, albeit recovering, Trump holds a slight edge over Biden when it comes to ‘making good decisions about economic policy’ (the #1 issue for voters), but this is only a slight lead (+1), and he might have thrown some of this goodwill away by his possible COVID-recovery induced decision to negotiate with himself about stimulus packages over Twitter - something that sent US shares tumbling.
The Art of the Deal indeed. Image source: Twitter.
As we’re not political science experts here at Savings.com.au that’s about the extent of the election forecasting we’re going to do. While nothing is guaranteed, current trends indicate a potential big win for Biden (I stand by ready to eat my words).
Preface: What effect will this have on the US economy?
Major investment firms Goldman Sachs and Moody's have stated in recent reports that a Democratic “blue wave” - a sweep of the House, Senate and White House - would improve the US economy, despite the President’s claims that the Democrats would “shut down our economy” if they win.
Goldman Sachs wrote that a blue wave, currently the favoured outcome according to FiveThirtyEight, would “sharply raise the probability" of a fiscal stimulus package of at least $2 trillion, something the Republican-led Senate has repeatedly blocked. It also cited Biden's longer-term spending plans on infrastructure, climate, healthcare and education, as well as long-term tax increases on corporations and higher-income earners, would result in “substantially easier US fiscal policy, a reduced risk of renewed trade escalation, and a firmer global growth outlook”.
Moody’s meanwhile found Biden’s economic proposals would create a further 7.4 million jobs compared to Trump, saying “the economic outlook is strongest under the scenario in which Biden and the Democrats sweep Congress and fully adopt their economic agenda”.
Closer to home, Commsec noted that Democratic Presidents have outperformed their Republican counterparts in terms of returns on the S&P 500 index. Under Democratic control the S&P has recorded a 13.2% gain compared to 9% for Republicans. Oddly, a combination of a Democratic President combined with a Republican Congress has historically produced the best annual returns.
Historically though it doesn't seem to matter too much - the line always goes up long-term.
Source: Switzer Daily.
But why should we care about the US economy? Well, we’ll explain the ways it can impact us all the way down here below.
How the US election results will affect Australia
What happens in the US affects the rest of the world, and with this upcoming election set to be the most partisan in living memory, CommSec analysts say it is now the “single biggest risk ever faced by financial markets”.
The US economy is the world’s largest economy, and Australia has a very close economic relationship with the USA. According to the US Census Bureau, in 2016 alone, exports to Australia generated 264,000 US jobs and in more than 15 states Australia ranks among the top 10 export destinations. There are estimated to be more than 3,000 points of presence for Australian business entities across all 50 states, with more than 140 Australian companies earning or valued at $20 million or more, 47 of which have 250 employees or more, according to the Australian Trade and Investment Commission.
Image source: Department of Foreign Affairs and Trade
The US is still the bellwether for the global economy, but this is changing with the rise of China as a global player, according to Honorary Fellow at The University of Queensland Business School Dr Rand Low.
“Australia’s top exports are to Asia (almost 70%; China being 32.6% and Japan being 13.1%) and the US only constitutes 3.7% of the export market share. (The) US continues to be an important trading partner with Australia primarily because they are our second largest import source," Dr Low told Savings.com.au.
"Australia’s largest import source is China at 19.4% of the total import share. As was observed during the Global Financial Crisis of
"In that sense, the Australian economy is more connected to Asia than it is to the US economy."
According to Dr Low, Australia is underpinned by the following diverse characteristics:
Culture - European
Defence/International Security - American
Economy - Asian
“As such, Australia has to carefully manage tensions between its European, American, and Asian interests,” he said.
But how do US elections impact us directly?
All this talk of exports and the economy might not mean much to the average Australian who probably just want to know: how will this affect me directly? That is, how their share market portfolio or super fund will be impacted, whether their home loan interest rates will change etc.
According to Dr Low, US elections have a minor role to play on Australian everyday finances, but they do have some impact.
“In the short-term, the Australian share market can be impacted by the US share-market due to a spillover effect. In the long-term, the Australian share market is underpinned by the Australian national economy that is driven by our top export partners and products,” Dr Low said.
So the US election could have a sharp short-term impact on our share market, but little to no long-term effect.
US elections also tend to not have much of an effect on Australian consumer confidence, but they can have a slight impact on things such as interest rates.
“Financial issues such as interest rates on home loans, deposits etc. in Australia are impacted by US events especially any interest rate or quantitative easing actions taken by the US Federal Reserve. This is no different for any other modern economy.
“It is likely that Australian interest rates on home loans and deposits are likely to stay the same or trend lower given the precariousness of Australia’s economic situation.”
Below we’ll take a look at the impacts of a Biden win, a Trump re-election, a contested election, or the worst-case scenario of Trump refusing to leave office as he has threatened to do.
Impact of a Biden win
As the favourite to win this close to the election, it’s looking likely that Joe Biden will be President come January next year, and with him should come an increase to the US corporate tax rate, a higher top marginal tax rate, an increased focus on renewable energy and a more robust response to the coronavirus.
While the prospect of higher taxes might spook investors at the start, long-term there’s likely to be minimal damage done to the share market.
“If the presidency is won by Biden, there will be more uncertainty surrounding the US domestic economic policy,” Dr Low said.
“Although it is hoped that Biden will have a conciliatory approach to geopolitics, how he can successfully implement domestic economic and foreign policy if congress continues to be under Republican control remains an unknown.”
According to Commsec analysis, the Australian dollar is expected to rise by 2-3% against the USD if Biden wins the Presidency but the Republicans maintain control of the Senate. The more likely scenario at the moment, however - a Democrat clean-sweep of the Oval Office, Senate and House - would result in a 2-3% fall in the Aussie dollar against the greenback. This could be useful information for people looking to buy goods from the US, especially with our reliance on online shopping post-pandemic.
Impact of a Trump win
Although he’s now definitively an outsider, Trump is not down and out just yet. The polling might look bad, but nothing is certain, and with the pandemic and mail-in voting by the millions, a Trump re-election is entirely possible, and with it increasingly isolationist trade policies and a ramped-up trade war with China. The economic recovery from the coronavirus is less certain, given the administration’s lack of a clear plan to deal with its escalating case numbers.
“If the presidency is won by Trump, businesses feel that there is more consistency in terms of his economic policies to minimise taxes, reduce ESG investments, and a 'smaller' government although these may be implemented in a haphazard manner,” Dr Low said.
“The uncertainty about a Trump win are the geopolitical risks and the US commitment to being a global hegemon.”
AMP Chief Economist Shane Oliver said a Trump victory will mean more of the same and would likely initially be more positive for the US than global and Australian shares.
“US shares may initially celebrate and outperform global and Australian shares but would be vulnerable next year as the trade war with China ramps up again,” Mr Oliver said.
According to Commsec, A Trump win along with the Senate and House remaining the same would result in a 4% fall in the AUD to the USD.
Impact of a contested-election
Despite the odds seemingly being in Biden’s favour as things stand, most (61%) of Wall Street fund managers expect the election outcome to be contested, something the President has said he will do multiple times.
Q: Will you commit to a peaceful transfer of power after the election?— Aaron Rupar (@atrupar) September 23, 2020
TRUMP: "We're gonna have to see what happens." pic.twitter.com/Dzj7Q9ZJqv
This has been dubbed the “worst-case scenario” for investors, and if the election is contested, or if Trump simply refuses to leave office - leading to a constitutional crisis - it could result in US shares falling 5-10% or even more, according to Commsec.
“A contested election or a refusal to leave office will increase the magnitude and length of time of Australian share market volatility,” Dr Low said.
Savings.com.au’s two cents
While the US Presidential election can impact our economy in many ways, it won’t have as much of an effect on your wallet or bank account personally. The biggest way this US election has the potential to impact your money is on the share market. Investors hate uncertainty, and with this US election presenting plenty of that, readers with money invested in both international and domestic shares should brace for a period of volatility, just as they did in 2016. On November 9 2016, the S&P/ASX200 index opened 0.9% higher before slumping 4% due to Mr Trump’s unexpected victory.
Regardless of what happens, it’s important not to panic and sell everything if you see stocks start to fall. This is likely to be temporary. Despite that initial panic over Trump’s election in 2016, things ended up going quite well for investors pre-coronavirus, with the S&P 500 index rising 30% in his first three years in office.
Rather than obsessing over the election outcome, investors down under should assess their portfolio to see if it still aligns with their personal circumstances, and if they’re still not sure in the run-in to the election, consider speaking to a financial advisor.
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