Trump isn’t gone yet : extraordinary election

First of all, Trump’s recent upturn in the predictive markets, and to a lesser extent in the polls, is remarkable stricto sensu. Yet historical analysis of the political cycle is clear cut. Since 1854, only one president has been reelected in the wake of a recession occurring in the last two years of his term, i.e. William McKinley in 1900. Moreover, this case is unusual because McKinley benefited from the positive effect of the US victory against Spain and the transfer of colonies to the US. The other 6 presidents who stood for re-election against a backdrop of recession all lost: William Taft (1912), Herbert Hoover (1932), Gerald Ford (1976), Jimmy Carter (1980) and Georges H.W. Bush (1992).

A Trump victory would thus be astonishing as we have just experienced the worst recessive shock since the early 1930s. While Trump is obviously not responsible for this, his communication during the pandemic has been lacking to say the least.

Secondly, the material likelihood of the popular vote and the Electoral College vote showing a different outcome (as in 2000 or 2016), and a different presidential and Congress majority exacerbate uncertainty.

Thirdly, what about Trump himself? First, we should remember that he never truly acknowledged his ‘defeat’ in the popular vote in 2016. Recently, a journalist asked him: “Will you commit to a peaceful transfer of power after the election?”, to which he replied: “We're gonna have to see what happens”.

All in all, the political situation seems rather fragile as the US presidential election approaches. Something that seems not to be priced in at the moment, US political uncertainty remaining quite low at the moment.

We should be aware that the election is liable to have an impact, not only until 3 November but also far beyond. First, the President’s term of office ends on 20 January 2021. This is very important because Trump will remain President whatever happens for many long weeks and will have the means to wield pressure. This is a major difference with 2000 when Bill Clinton was President. Then, and without going into an excessively complex analysis, the process for designating the President follows a precise sequence:

- 8 December: deadline for States to have resolved all ballot counting issues;

- 14 December: the Electoral College (538 electors) officially casts its votes for the President and Vice-President;

- 6 January : Congress counts electoral votes and declare winner

During that time, appeals are possible with the State Supreme Courts (as in the Florida Supreme Court in 2000), or even the Federal Supreme Court. We believe that there have been two previous cases when the US presidential election was contested, i.e. Samuel J. Tilden vs Rutherford B. Hayes in 1876 and, more recently, Al Gore vs George W Bush in 2000.

 In 2000, it took five weeks from election day (7 November) to Al Gore conceding defeat on 13 December (following the Federal Supreme Court ruling) during which several appeals had been lodged following a mix-up in ballot counting in Florida, . Over the period, the SP 500 fell 8% from peak to trough, IG credit spreads widened by 30bp and HY spreads by 170bp at the peak, the USD remained relatively steady (in effective terms) and gold gained 4% at the peak.

The situation at the end of 2000 was admittedly somewhat unusual: risky assets were on a downward trend due to the US economic slowdown and the TMT bubble was slowly deflating.

All in all, given that the markets may well remain vulnerable in October and November (pandemic in Europe, no new monetary policy measures, downturn in macroeconomic surprises, no renewal of exceptional jobless benefits in the US, Brexit, mounting default rates, a highly concentrated US market, etc), all this is likely to crank up risk aversion by a notch. Furthermore, risk appetite is only relatively neutral after weakening in recent days. All this argues in favour of keeping a cautious bias on the markets, with a few hedging operations, despite the recent market downturn.

Jean-Pierre Petit