Why aren’t markets fretting more about how the US election polls are tracking?

US elections are always significant, but this one is surely turning out to be one of the most significant in modern history for both the world’s largest economy and the rest of the developed world. So far, as we’ve come to expect in 2020, nothing about how it is playing out is simple.

The odds: what we know so far

In recent months, Trump’s re-election chances have fallen. Surveys indicate that part of the reasoning for this is a sense of disapproval of Trump’s handling of the COVID-19 pandemic and recent civil unrest. This is against a backdrop of the US being in its deepest recession since the 1930s.

Going into the third week of October, Biden’s average poll lead is around 9 points and his average poll lead in battleground states is around 4.4 points. Trump’s approval rating is around 44.8%, the PredictIt betting market puts Biden’s probability of winning at 64% and the probability of a Democrat clean sweep at 55%.

It’s interesting to note that Biden’s poll lead over the last six months has been more stable and wider than Hillary Clinton’s was during the 2016 presidential race. However, as 2020 has taught us, things can change quickly!

Further, while we know that Trump has bucked trends before, historical record indicates incumbent presidents tend to lose when there is a recession in the two years before the election and unemployment levels rise.

Key policy areas: Biden versus Trump

As it stands, here is what we know about some key policy areas. Keep in mind that whoever takes office may need to react to a weaker economy than when this election race started:

• Taxation: Biden plans to raise the corporate tax rate to 28% (reversing half of Trump’s cut to 21%), return the top marginal tax rate to 39.6% (from 37%) and tax capital gains and dividends as ordinary income.
• Infrastructure: Biden plans to spend $1.3trn over 10 years.
• Climate policy: Biden aims for the US to reach net zero emissions by 2050 by raising the cost of fossil fuels and boosting the development of alternatives (possibly with a carbon tax).
• Regulation: Biden is likely to end the era of deregulation.
• Healthcare: Biden wants to strengthen Obamacare and limit drug prices.
• Trade and foreign policy: Biden would likely aim to de-escalate tensions with Europe and strengthen the alliance, work with international organisations like the World Trade Organisation, work to re-establish the nuclear deal with Iran and adopt a more diplomatic approach to dealing with trade and other issues with China (working with Europe and Asian allies in the process). By contrast, a re-elected Trump is likely to double down on his trade war with China and possibly elsewhere including Europe.
• Budget deficit: For the near term, the budget deficit is likely to remain high whoever wins, but historically they have fallen under Democrats after rising under Republicans. That said, if the economy proves slow to recover Biden may be more likely to respond with large public sector spending programs aided by ongoing Fed quantitative easing in order to deal with ongoing high levels of spare capacity and unemployment.

So… why aren’t markets fretting?

On the face of it, you’d expect markets might have been fretting more in the last few weeks with Biden being out in front and promising higher taxes and more regulation.

In addition to higher corporate and top marginal tax rates, an increase in regulation and a rise in the cost of carbon, which is expected to weigh on energy companies when they are already struggling, are negative for the growth outlook. For example, the rise in the corporate tax rate would knock around 6% off earnings per share for S&P 500 companies. In particular, these measures may reverse some of the supply side boost provided by Trump.

However, it’s never that simple, especially with all the variables at play this year. Here’s a few things to consider in that respect:

1. The negative impact of higher taxes and more regulation would be offset by more fiscal stimulus under Democrats. Increased infrastructure spending could also help here. It’s also worth considering that, once in office, Biden may dampen down his planned tax hikes, particularly if the economy is still weak.
2. A clear Democrat victory would avert a worse case contested election.
3. Biden will likely mean more stable policy making with less trade wars. Biden’s trade and foreign policy is focussed more on strengthening ties with Europe and a diplomatic approach to dealing with China. Remember that 2018 which saw trade wars escalate under Trump was not a good year for shares.

Finally, quite aside from the above – after 2016, where polling is generally seen to have got it wrong, many people may simply not be believing the current odds.