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Economics & Markets

Econosights: US Election – implications from the Democratic primaries/caucuses and the risks from the Coronavirus

By Diana Mousina
Economist - Investment Strategy & Dynamic Markets Sydney, Australia

Key points


The two candidates left in the Democratic nomination race are Joe Biden (a moderate Democrat) and Bernie Sanders (far-left leaning).


The risk for markets is a Sanders nomination because of his support for significant tax hikes and regulation.


However, large wins for Biden in recent state votes mean that Biden is on track to be the Democratic nominee.


The hit to the US economy from the coronavirus means that a US recession is likely over the June/September quarters. This will hurt Trump’s re-election odds.


While coronavirus issues are the main factor driving economies and financial markets now, there are other important events that will shape financial markets once coronavirus fears eventually start to subside (which we hope will occur in the second half of the year). The US Presidential election (on 3 November) is a key event for markets to follow. Before the election is held, the Democrats will vote on their candidate to represent them at the federal election in voting events called primaries or caucuses. We look at the implications from these Democratic voting events for the US economy and markets in this Econosights.

Democratic candidates

The Democratic race started out very crowded with five key players (see chart below) but has had a very fast drop-out rate over the past month with the two main candidates left being former Vice President (and moderate) Joe Biden and far-left leaning Senator Bernie Sanders.

Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital

Sanders was the favourite to win the nomination for the most part of 2020 but this changed after large wins for Biden in recent state votes. Joe Biden is on track to be the Democratic nominee for the 2020 Presidential election, but there are still some upcoming state elections that need to watched.

Some background to the US primaries/caucuses

The US primaries is part of the voting process for the Republican or Democratic candidate. The Democratic primaries will finish in early June and the final candidate will be confirmed at the Democratic national convention held over July 13-16. The candidate is decided by “delegates” (individuals who represent their candidate at the national convention). The candidate with more than 50% of delegates wins the nomination. The way to get delegates is through the voting process done via primaries or caucuses.

US states can hold either a primary or a caucus vote to elect candidates. A caucus is a traditional way of selecting candidates by a meeting of party leaders to elect the candidate but is only used by few states. A primary election is the more modern method used by the majority of states where voters go to a secret ballot to case their delegate vote. The number of votes received at each caucus or primary determines the number of delegates awarded to each candidate (each state has a different number of delegates awarded). In the current process, a candidate needs at least 15% of the votes in any of the primaries or caucuses to receive any delegates and remain in the race. By the end of March around 65% of the voting will be complete and we should have a definitive idea as to who the Democratic nominee will be.

In the case of no candidate having the required >50% of delegates by the Democratic convention, it then becomes a “contested convention”. This means that the party delegates would hold a series of votes to determine the winner by using “superdelegates”. These are non-delegate senior members of the party who can vote for any candidate but who usually tend to rally behind the strongest favoured candidate, to provide a sign of party strength. Contested conventions are not frequent. The last time this happened was in 1952 for the Democrats and 1976 for the Republicans. It is not looked upon favourably as it signals party uncertainty and infighting and usually gives more support to the opposition. There is unlikely to be a contested convention this year.

The number of required delegates for a majority is 1991. Biden has secured around 1180 delegates (59% of the number required for a majority) and Sanders has 885 (44% of that required) – see the chart below.

Source: Real Clear Politics, AMP Capital
Source: Real Clear Politics, AMP Capital

In terms of the sitting president, other candidates can run against the incumbent, but Trump has had virtually no competition for the Republican nomination.

Implications of a Biden Democratic nomination

Biden’s key campaign policies are around:

  • Healthcare – undo some of the cuts to the Affordable Care Act done by Trump to take the policy closer to Obamacare with the aim to make health care more accessible and pricing transparent. This cost to the budget be funded via higher taxation. Generally seen to be positive for healthcare stocks.
  • Taxes – personal tax rates would be increased from current amount (but less than under Sanders) to a top tax rate of 39.6% (higher than the current 37% but not as bad as the 52% advocated by Sanders), increase the taxes on investment income, increase the corporate tax rate to 28% (from 21% currently). 
  • Global trade – Biden does not favour using tariffs a trade tactic. However, this does not mean that tariffs on China would be unwound given the bipartisan sceptic view on China. If anything, a Biden presidency might even delay progress on trade talks.
  • Climate – infrastructure spending will be focused to investment into clean energy projects. If the Democrats take the Senate then could pass a carbon tax – which could hit US mining stocks.
  • Student debt – will not cancel all student debt like Sanders was proposing. But there will be some payment plans for students to alleviate debt concerns which are a cost to the budget.
  • Regulation – Biden is a supporter of Dodd Frank Act which Trump reversed which means more regulation for financial services. While Biden has said that he would look at breaking up big tech companies like Facebook or Amazon this doesn’t appear to be a priority, although it might be a concern for investors. 

Trump’s election campaign is not dissimilar to his policies over the past three years: protectionism, support for local jobs, less regulation. However, his focus now is on supporting the economy and providing fiscal stimulus to offset the disruption to the economy from the coronavirus.

Impacts of coronavirus on US presidential election

A lot can change within a matter of weeks. A month ago we would have said that Trump is the likely winner of the US election but now things look different. We think that the disruption to economic activity from the coronavirus along with the plunge in the oil price will push the US into a recession over the June/September quarters. The unemployment rate is expected to rise towards 10% or more or higher from its 50 year low as lockdowns mean reduced spending and firms have to lay off stay or delay hiring. The economy should be out of a recession by the time of the election in November, but the “hangover” from the hit to the economy would still exist. A US recession and its lingering impact is a big risk for Trump’s re-election. Sitting presidents tend not get re-elected in times of recession. It has only happened three times in the past - (William McKinley in 1900, Teddy Roosevelt in 1904 and Calvin Coolidge in 1924). As a result, Trump’s re-election odds have fallen a lot (see chart below). Unless Trump can reign in US coronavirus infections within a short time (2-3 months which looks unlikely), it will be difficult for him to be re-elected.

Source: Bloomberg, AMP Capital
Source: Bloomberg, AMP Capital

The other issue is that the US health system will come under pressure as coronavirus cases continue to rise which Trump could be blamed for. A large fiscal stimulus package from the government with decent handouts to households will be helpful in preventing an even deeper downturn in the economy but we don’t think it will be enough to avoid a recession.

Implications for investors

Investors are (understandably) focussed on the risks to markets from the coronavirus. This will remain the case for the next few months. To see the bottom in sharemarkets there needs to be a sign that the change in new coronavirus infections has reached a peak (in the US and Europe where the problem now is). We have not reached this point yet.

A Biden Democratic nomination (rather than Sanders) is viewed favourably by financial markets because of the reduced risks of higher taxes and regulation relative to the “socialist” Sanders. However, Biden is still more left leaning than Trump so signs that he is going to be the US President is still a downside risk that investors need to consider, but its relatively minor compared to if Sanders were the alternative.

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Diana Mousina, Senior Economist
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While every care has been taken in the preparation of this article, AMP Capital Investors (UK) Limited, Registered Office at Companies House, 4th Floor Berkeley Square House, Berkeley Square, London W1J 6BX (no. 05524536) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.

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