The U.S. Elections and the impact on the markets

Oct 02, 2020 | Elinesky Schuett Private Wealth Management


Our commentary this week is focused on the U.S. Elections and the bout of unease that is currently affecting the markets due to the ongoing concerns related to COVID-19.

A U.S. flag with the republican and democratic logos in front.

Markets were set to finish the week higher until the revelation that U.S. President Donald Trump, and the First Lady Melania Trump, had tested positive for the coronavirus. This development adds yet another source of near-term uncertainty as investors will be left considering the risk of infection to other government officials, the influence this could have on fiscal stimulus negotiations, and the potential impact on the U.S. elections.  We expect this bout of unease will eventually settle once some clarity emerges over the days and weeks to come. Until then, we expect more questions than answers.

The past week was characterized by ongoing concern on additional waves of the virus which we address below. Meanwhile, we discuss the most plausible U.S. election scenarios and implications for markets. 

Coronavirus update

Our attention over the past week has been focused on Canada and the U.S. given the former’s second wave and new signs of resurgence for the latter.

In Canada, the rate of new infections continued its ascent over the past week. The seven day moving average of new cases is over 1,500, close to double the level from a few weeks ago. There have been no signs of reemergence in the Maritimes or the Northern Territories. Quebec and Ontario continue to garner a lot of attention as the absolute case numbers are elevated (averages of over 700 and 500, respectively), but the virus is spreading elsewhere too. Manitoba and Alberta are seeing an uptick, and new cases per capita in each province are the second and third highest in the country, respectively. Saskatchewan has seen a relatively stable rate of new infections for a second straight week. Lastly, British Columbia has shown some early signs of stability in its rate of infection growth and, according to the province’s Centre for Disease Control, the reproduction rate of the virus in the province may be set to decline below the threshold of 1. This threshold indicates that each new infection is less likely to affect another person.

In the U.S., the rate of infection growth looks to be turning higher yet again after a period of relative stability. The growth in infections over the past week has been widespread. For example, there has been a noticeable increase in new cases across previous hot spots such as Texas and California, while some less severely impacted states such as Wisconsin, Alabama, and Pennsylvania are now seeing an acceleration in new cases. Even the state of New York, which had made significant progress since the earlier days of the pandemic, has seen a noticeable increase.

We remain preoccupied with the health risk and the overall threat this resurgence poses to economic activity should governments have to consider more restrictive measures of containment.

Implications of U.S. elections

It is very unclear how the infection of President Trump may alter the elections. We expect to have more thoughts in time. For now, we focus on the potential outcomes after the elections and the implications for the markets.

The U.S. government is designed purposely so that one particular person or part of the government cannot easily make sweeping changes. Understandably, the presidential election gets most of the attention. But, one aspect that often gets less coverage is the election cycle for the U.S. Congress. Yet, Congress, whose two chambers consist of the House of Representatives and the Senate, plays a very important role as it is the only part of the government that can create new legislation.

Currently, the U.S. government is divided with a President that is Republican, a Senate that is controlled by Republicans, and the House of Representatives controlled by the Democrats. We believe there are three likely election outcomes:

  1. the status quo, with Donald Trump being re-elected with a divided Congress;
  2. Joe Biden winning the Presidency with a divided Congress; and
  3. a Democratic sweep, with Joe Biden becoming President and the Democrats taking control of both chambers of Congress.

We expect the first two scenarios described above could have a relatively negligible impact on the equity markets because they are less likely to result in uncertainty, which is often a driver of market volatility. A status quo outcome would lead to little change on the policy front with respect to taxes, energy production, and trade, among other things. The second scenario would result in some potential changes with Joe Biden as President, particularly around some of the tax cuts, approach to trade, and a renewed focus on issues such as climate change and renewable energy for example. But, a divided Congress in this scenario would certify that policy changes would be relatively modest. The third scenario, in our view, could lead to higher uncertainty, as a Democratic sweep could pave the way to more substantial policy shifts with less legislative hurdles for the new government to overcome.

A fourth scenario has emerged of late. It likely presents the highest risk, albeit for a short period. A contested election, whereby a candidate rejects the outcome due to irregularities or accusations of fraud for example, has become a possibility given complaints about the handling of mail-in ballots. These ballots are not new but are expected to play a bigger role this year because of the pandemic.

A contested election is unusual, but there is some historical precedence. In 2000, the votes in the state of Florida were so close that it led to a contested outcome between Democratic candidate Al Gore and Republican candidate George Bush. The uncertainty that emerged drove higher volatility between November and December 2000, and equity markets declined as a result. A return to more normal levels occurred by January 2001, at which point a clear outcome was already established.

It remains difficult to predict the future, but we are prepared for elevated volatility through the end of the year. While elections matter, the U.S. system is designed to ensure that far-reaching policy changes cannot easily be enacted unless there is sufficient support from both parties. Furthermore, there are other drivers that may arguably be more important for the equity markets. These include the economic cycle, corporate earnings growth, monetary policy and the availability of credit for example. This year, another factor has emerged that has arguably become just as, if not more important: COVID-19.


October is Cyber Security Awareness Month!

Throughout the month of October, we will be sharing cyber security articles, resources, and videos in our weekly posts to help to keep you safe online. We’ll also be posting additional resources our Facebook page – When you visit our page, don’t forget to click the ‘like’ or ‘follow’ button!

Malware/Ransomware Alert: Fake COVID Contact Tracing Apps

Fake apps and websites masquerading as COVID “contact tracing” programs have been discovered by cyber experts. Coinciding with the launch of official government programs and technologies to combat the spread of COVID and help manage pandemic risks, the bogus sites are designed to trick users into downloading malicious software containing ransomware.

Here are a few Do’s and Don’ts to help to keep you safe when installing apps or software:

  • Install applications only from authoritative sources, like trusted app stores.
  • It’s easy to make official-looking websites. Make sure you look carefully to make sure it’s the “real deal” before installing any new apps.
  • Exercise care when downloading software, opening attachments or clicking on links in emails/texts.
  • Back up devices and ensure settings are kept up-to-date.
  • Continue to be on high alert for pandemic-related scams.



10-Minute Take

The 10-Minute Take is a podcast series dedicated to providing insights from RBC Economists and market experts on events unfolding around the globe.

Why the airline industry is bracing for more turbulence

If you felt your travel plans were disappointing this summer, spare a thought for the airline industry. Border restrictions, travel advisories, mandatory self-quarantine… policies that are critical for public health have been devastating to carriers, which are hemorrhaging millions of dollars each day. When will travel get back to normal? How does the propensity to travel differ across classifications? And how are carriers convincing customers that it’s safe to fly again? Walter Spracklin, Transportation and Industrials Analyst at RBC Capital Markets, shares what the airline industry needs to recover from the COVID crisis.

Listen to the latest 10-Minute Take podcasts online now: The 10-Minute Take.


Community Corner

Each week, we like to end our posts with a few good news stories from in and around the community. We hope that they brighten your day!