October 22, 2020

What could the U.S. presidential election mean for your investments?

With the U.S. presidential election scheduled for Nov. 3, Canadians can expect a flood of news and information in the weeks leading up. And given the particularly rancorous tone of this election – in the midst of a global pandemic no less – cutting through the noise will be particularly challenging. Especially when guessing what the outcome might mean for Canadians, our economy and your investments.

Global financial markets are likely to react to daily developments – both the good and the bad. Therefore, it’s important to remember that market volatility is normal and that reacting emotionally is never a good investment strategy. This quick overview of possible election outcomes and a comparison of the major party platforms can help you keep the issues in focus. From there, rest assured that your long-term goals and outlined investment strategy are still the keys to success.

What are some possible election outcomes?

While noting there’s always room for surprises, our fund manager partners at Fidelity Investments offer these as the most likely scenarios and financial implications:

Scenario One
If President Donald Trump wins a second term and Congress remains split between a Democratic House of Representatives and a Republican Senate, the focus is likely to remain on deregulation and lower taxes for corporations and individuals.
Scenario Two
If Democratic candidate Joe Biden takes the White House and Republicans hold the Senate, changes to tax and spending policy are likely to be curbed by a Republican Senate.
Scenario Three
If Biden takes the White House and the Democrats control Congress, we will likely see re-regulation of some industries; higher taxes on corporations, upper-income individuals and investors; and increased fiscal stimulus.

How might financial markets react?

In terms of which outcome would benefit investors most, Stephen Dover, Head of Equities at Franklin Templeton Investments, says: “a split Democratic and Republican-led government would actually be quite good for markets. The prospects of a ‘blue wave' we believe for investors, would be concerning as we could see a very dramatic shift in government posture and policies toward markets, businesses, as well as towards regulations.”

Here’s a breakdown of potential market impacts by key policy area, based on analysis from Fidelity Investments:

Key areas
Potential impacts
Regulation The Trump administration has focused on deregulating markets, including the oil and gas industry, which benefited from loose environmental regulations. A Biden administration would likely reinstate certain regulations and push for cleaner energy. Other market sectors would also be open to greater scrutiny, including health care, financial services, and technology.
Spending Biden has proposed increased federal spending as well as shifting the tax burden from middle-income taxpayers to corporations, high-income taxpayers and investors. Loosely, that would mean more short-term fiscal stimulus under a Democratic presidency than a Republican one – especially if the Democrats control congress.
Taxes The Trump administration has focused on lowering federal tax rates on corporate and individual income, and capital gains. The president has also hinted at further cuts during a second term; with a Democratic House, however, that could be hard to achieve. Biden has proposed increasing the top tax rate for corporations and individuals. He has also proposed disincentives for share buybacks, which have helped to drive stock valuations higher in the U.S. than in other countries. Increases in corporate-tax rates would cut into earnings, which are an important driver of stock prices.
Trade On the topic of trade, any differences between the parties are more style than substance. Trump’s confrontational approach – and his use of social media to criticize China – has unsettled markets over the last four years. Biden will likely employ a more diplomatic approach to trade relations. Regardless of the election outcome, trade with China will remain a key issue.

Greg Valliere, Chief U.S. Policy Strategist at AGF Investments, summarizes it this way: “The markets are in their own universe, stoked by the likelihood of ultra-low interest rates for years to come. But there’s no question that higher taxes are coming if Biden wins, along with a less favorable climate for several sectors such as fossil fuels, defense, financial services, etc.”

On the plus side, Vailliere adds: “Biden would get the stalled stimulus bill enacted, a booster shot for the economy, and he would bring far more stability and predictability to Washington policymaking. And he would tone down the trade tariffs, to the relief of corporations here and abroad.”

Key take-aways

While industry experts can plot possible election scenarios and forecast how markets might react to various policies, the big unknown is when the outcome will be deemed official. This subjects any of the outcomes to more, unseen factors. Obviously, the pandemic presents significant challenges to the U.S. electoral process, making in-person voting more difficult, and adding a potential delay in the counting of votes (due to higher volumes of mail-in ballots). Partisan-fuelled challenges to election results could lead to unprecedented post-election turmoil.

Given the ongoing pandemic, the passion of each respective voter base, and the uncertainty around how and when disputed results will be resolved, market volatility can most certainly be expected. At times like these, it’s important to remember that:

  • Volatility is a normal part of investing. Markets will react to political uncertainty, elections and policy changes. Keeping your emotions in check – and staying focused on a plan that’s geared toward your goals and risk tolerance – can be essential to your long-term investing success.
  • Media and news reports can be informative and beneficial, but they shouldn’t be a driving force in your decision-making. Market performance always needs to be put into perspective, with your goals at the centre. Speaking with a financial representative can add far greater value than merely following the headlines.
  • Having professionally managed investments is both comforting and valuable in reaching your long-term financial goals. The investment fund managers we partner with have been through market uncertainty before. They understand the market, are equipped with sound strategies, and take an approach that’s designed and proven to outlast market volatility.

For more resources and financial-market news, visit Market View.

If you have questions about your investments, please contact your financial representative.*


*In the province of Quebec, the authorized representatives are Financial Security Advisors who have been duly certified by the Autorité des marchés financiers.

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