Joe Biden and Donald Trump
Markets have started to factor in the presumption of a rematch between Joe Biden, left, and Donald Trump. But whoever wins will face serious spending constraints © FT Montage/AFP/Getty/Reuters

In a year of elections around the world, the US polls in November are looming the largest for markets.

Were this any normal election year, investors would at this point be watching the US presidential contest with detached interest, confident they had months still before it might affect their money. Typically, many investors only focus on the electoral outcome in the US autumn, shortly before voters head to the polls.

This year, however, is proving a little unusual, with investors turning their attention to the elections earlier — partly because of the high political stakes and partly because of the shape of the race.

There are obvious and considerable uncertainties surrounding the candidatures of both Joe Biden and Donald Trump. Biden is facing intense questioning over his capacity to serve another term triggered by a US Department of Justice special counsel report. And Trump faces a welter of legal challenges.

Markets have been starting to factor in the presumption of a Biden-Trump rematch — the first time since 1892 that a defeated incumbent has challenged the sitting president who beat him four years earlier.

As Biden is in power and would most likely seek to continue his current policy path, the contest is being more often thought about in terms of what would change if Trump won. In 2016, the S&P 500 gained about 6 per cent in the six weeks following Trump’s win. Over his entire term, the S&P 500 gained 57 per cent, compared with 48 per cent so far under Biden. Cyclical stocks more exposed to the economy outperformed in the six months running up to both 2016, when Trump won, and 2020, when Biden won, according to Barclays strategists.

Trump being Trump, the policies that the former Republican president would pursue in a second term would no doubt be unpredictable — but there are some clues.

“There are multiple scenarios, but if it is Trump, history or animal spirits will say that short-term it is good for companies, for some sectors like defence [and] its good for lower taxes,” says Vincent Mortier, chief investment officer of European fund group Amundi.

An important area of worry for investors. though. is a heightening of trade tensions with China. A Washington Post report that Trump is weighing options for a huge escalation of trade tariffs and other action against the US’s rival superpower was one factor behind the recent sell-off in Chinese stocks. And there could be implications elsewhere.

Xiao Cui, US economist at Pictet Wealth Management, notes more restrictive trade and immigration policies under Trump could be perceived as more inflationary.

And Citigroup warns that the net impact of a Trump “red wave” election would be bearish for oil as trade tensions hit oil demand. It says a warmer US-Saudi relationship might mean Opec+ bringing more oil back to market. An earlier resolution to the Russia-Ukraine conflict could also ease oil and gas supplies. However, a Trump administration might clamp down on Iran’s oil exports.

Another area to watch if Trump wins is the US Federal Reserve. Trump reasserted last week that he would not reappoint Jay Powell as chair of the central bank.

“We expect Fed independence to endure but, while not our central case, there’s a risk that communication changes and dissent grows,” Morgan Stanley analysts wrote on Wednesday. But they added: “We’re hard-pressed to see a scenario come to fruition where the executive branch [of government] de facto sets monetary policy.”

If both Trump and Biden run, limits might prove a central theme for investors. In addition to each only being able to run for a single additional term, they also face spending constraints, as Powell himself pointed out this week when he told CBS’s 60 Minutes that the US was on an “unsustainable fiscal path”. Projections this week from the Congressional Budget Office, the independent fiscal watchdog, forecast that government interest payments would account for about three-quarters of a $900bn rise in the US deficit over the next decade.

Goldman strategists said this month that significant shifts in the fiscal stance were more likely under unified government, with one party winning control of Congress — although the shift would probably be much smaller in 2024 than it was in 2020.

For all this, the main advice being given to investors is, for now, to hold still. A lot can change in the nine months before the polls.

“I hark back to 1992 when at this stage of the election season, George HW Bush was leading Bill Clinton by 22 points, and Clinton won,” says Tom McLoughlin, who is heading US election monitoring for UBS Global Wealth Management’s chief investment office. “We’re emphasising the need to stick with a pre-established plan and not become too preoccupied.”

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