US elections: three scenarios and one fear
Luxembourg, 30 October 2020 – The outcome of the US elections will affect stock markets. Perhaps only in the short term, but probably with a medium-term impact. “Many portfolio managers around the world have significantly overweighted the US”, said Michael Jensen, Head of Asset Management and Managing Director at Moventum Asset Management S.A. “What has offered good performance in recent months and years will then become a risk position.” Three scenarios and one worst case are conceivable.
The biggest risk of these US elections is that there will be no clear winner and a long period of uncertainty. This would be extremely negative for the markets, which prefer clarity. Since, in addition to the president, the House of Representatives and a third of Senate seats will be newly elected, a lot can happen. Three possible scenarios are emerging:
1. Biden becomes President, his Democrats get the majority in both the House of Representatives and in the Senate. “In the short term, a president being emphatically voted out would depress share prices”, explained Jensen. But these would be more like buying opportunities, because in the long term Biden would launch a major infrastructure package that could boost the stock markets. Higher government spending and also tax increases could lead to inflation, however, which would be negative for the dollar and also for US bonds.
2. Biden becomes President, the House of Representatives remains Democratic, the Senate Republican. This would result in a standstill. Stocks would briefly boom after the election, but then drift sideways in the absence of prospects.
3. Trump remains President, the House of Representatives remains Democratic, the Senate Republican. This election outcome would herald a phase of economic stagnation but international escalation. Stock markets would rejoice for a moment, but then slide into a downward spiral if Trump were to start trade and technology wars with China. Additional deregulation in the financial and energy sectors is likely to occur, and the division of US society would be exacerbated. “In any case, crisis mode would be active both nationally and internationally – poison for the stock markets”, added Jensen.
Now there is a worst case scenario in which a President Trump, who was voted out, refuses to leave the White House to make room for a new President Biden. A horror scenario for the markets. “If on 3 November 2020 the numbers do not show clear results, if one or even both sides see irregularities in the election process, if postal votes are added to the tally later, then such a scenario is possible”, said Jensen.
8 December 2020 will provide the first indications in this respect, as disputes over election results and recounts must be resolved by that date. But from 21 November to 8 December, chaos would reign in the most powerful country in the world. The world’s most important stock exchange would have nowhere to go and the world’s most important currency would just be a pawn in the game. A frightening picture, but in the analysis of probabilities of the four scenarios it still gets five per cent.
Scenario 1 is clearly in the lead at 45 per cent, scenario 3 is in second place at 30 per cent and scenario 2 is in third place at a probability of 20 per cent. For investors, this means that they can likely expect prices to rise from 2021 onwards. Sideways or downwards, at 30 and 20 per cent probability – in this case hedging would be necessary. “And if you bet on the worst case, you should sell short and then retreat into the mountains with lots of gold”, added Jensen.
Additional information is available at www.moventum.lu.
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