Will President Donald Trump win a second term or will he lose to a Democrat rival? The answer to that question has been on investors’ minds since late 2018 but will gradually grow in importance as 2020 progresses toward the November 3 elections.
There are three basic scenarios for the elections, with each one potentially resulting in different reactions in markets well ahead of the vote – as the primaries at the Democratic Party move forward and opinion polls shape expectations.
Here are the three scenarios and how markets may react.
1) Democrat moderate – stocks up, US dollar down
Investors would like a business-friendly leadership that a Republican president such as Trump can provide, but also a centrist Democrat has to offer. Former Vice President Joe Biden, businessman Michael Bloomberg, and South Bend, Indiana mayor Pete Buttigieg are among the leading Democrat moderates.
Markets would usually prefer any Republican against any Democrat, but Trump is far from being a typical leader of the center-right party. His trade war with China – supported by the business and also by the center-left opposition – has been erratic. The self-proclaimed “tariff man” has triggered uncertainty that weighed on investment. His threat to slap new levies on Mexico – over a dispute about migrant flows and after the neighbors reached a trade deal – has caused worries.
A President Biden or President Buttigieg is more likely to provide more certainty without risking the multilateral global arrangements and is likely markets preferred option. In that case, equities have room to rise while the risk-on sentiment may push the safe-haven dollar down. Greater global certainty and prospects for growth may shift investment to emerging markets and out of the US.
If Trump loses but Republicans retain control of the Senate, it would serve as an extra boost to stocks, as a Democrat would be unable to undo the incumbent’s 2017 tax cuts.
The closer a moderate gets to winning the Democratic Party’s nomination, the dollar may come under pressure. And after clinching a victory in the opposition party, any shift in polls toward a Democratic victory may also weigh on the greenback.
2) Trump wins – stocks up, US dollar up
The second scenario is that Trump holds onto power. In this case, it is highly likely that Republicans hold onto the Senate and may even have a chance at recapturing the House – even if the president fails to win the popular vote again.
As mentioned earlier, markets favor the president’s business-friendly agenda but dislike the wild nature of his trade wars. While stocks may rise with Trump’s chances of winning a majority in the electoral college, it may be an unfavorable scenario for the US dollar.
Trump may advance his trade war with China and extend the decoupling between the world’s two largest economies. Moreover, he may continue weakening global institutions such as the World Trade Organization (WTO) and the North Atlantic Treaty Organization (NATO). The rift with the EU – held back by the focus on China – may resurface and other clashes may arise as well.
Growing uncertainty about global growth and where to invest may send investors to the safety of the greenback. The rising probability that Trump is returned to the White House may boost the dollar.
3) Democrat left-wing wins – stocks down, US dollar up
The nightmare scenario for stock markets is that a leftwing firebrand such as Senator Elisabeth Warren – currently seen as the frontrunner in the Democratic primaries – or her colleague Bernie Sanders enters the White House.
Both politicians are seen as anti-business, with Warren focusing on financial institutions and Sanders on pharmaceutical companies. While both candidates may attempt to improve the lives of most Americans, their actions may cause uncertainty and weigh on business sentiment, thus pushing stocks lower.
Both lament the loss of jobs to globalization and may also enact trade policies that may accelerate the decoupling with China even if they do not damage multilateral institutions. As with the scenario of Trump’s reelection, the rising prospects of their candidacies may send the greenback higher, during their primaries’ campaigns and afterward in surveys vis a vis Trump.
US 2020 Presidential race – A quick timetable
February: The first caucuses are held in Iowa early in the year and the winner of this first contest may gain momentum – but the path to victory remains long. Additional polls in New Hampshire and South Carolina are also of high interest.
March: “Super Tuesday” is when former New York mayor and business magnate Michael Bloomberg enters the race and when several candidates may pull out of the race. The picture may become clearer as to which camp – moderate or populist – is in the lead.
Spring: During April and May, the bigger states vote and a winner will emerge by June. At this point, there will only be two scenarios – a Trump victory or one of the two Democratic options.
Summer: The main parties hold their week-long conferences in the summer and that is where policy proposals will sharpen up. A moderate may adopt populist messages and a populist may moderate their tone. It will also be interesting to see whether Trump strengthens his grip over the Republican Party.
September: Most Americans tune into the elections only after Labor Day and that is also when the candidates begin facing each other off in debates. Opinion polls will likely grow in importance.
October surprise?: The peak of the campaign is when every comment from the candidates and their surrogates, the debates, and any potential unknown factors may come into play, rocking markets. Speculation about postal voting is also likely to mount.
November 3-4: The elections and their aftermath. Apart from the identity of the White House’s occupant, markets will also examine the new composition of Congress and the first speech by the victor. Stay tuned for several previews ahead of the vote.
Get the 5 most predictable currency pairs
US 2020 Presidential Elections: Three scenarios for the dollar and stocks
