For the latter half of 2020, the US Presidential Election had the world on the edge of its seat.
No mean feat in a year that began, in Australia at least, with catastrophic bushfires, and a global pandemic still raging and ravaging economies across the world.
And yet, the Australian economy has fared better than most during 2020. While it’s true we are in a recession and, as of October, the unemployment rate is 7.00%, 2021 is looking brighter than we’d anticipated.
So, why is the result of the US Election still of such consequence to Australian financial markets?
In the lead up to the November 3, US Presidential election, markets were a little jittery. Understandably so. There was a lot riding on this election.
Prior to the outbreak of the Coronavirus, the US economy was in good shape. Sure, he’d inherited a strong economy from President Barack Obama, but Trump had continued to grow it over the three years from January 2017, when he was inaugurated, to early 2020.
Then COVID-19 shut down the world.
It cannot be denied. The Trump government’s botched handling of the coronavirus pandemic impacted the election. Trump’s initial denial to take the virus seriously, the continued politicising of mask wearing and his reluctance to close state borders means over 15 million Americans have been infected with the virus, and almost 290,000* have died since March.
The rising death toll, and a health system in crisis, more Americans than ever before came out to vote. In fact, almost 157 million Americans cast a vote in the 2020 election.
Joe Biden is the current US President-elect. His choice of Californian Senator, Kamala Harris as his Vice President, makes her the first woman and woman of colour to hold the position, and sets the platform for the US to move toward the next generation of leadership over the coming decade.
As expected, the Australian financial markets responded with equal positivity.
However, there’s one last sticking point: The US Senate.
As it stands, the Republican party holds 50 of a possible 100 Senate seats. The Democrats hold 46 seats with two more held by other parties.Â
The two undecided seats are in the state of Georgia, a traditional Republican stronghold. These two seats will be decided in run-off elections on January 5, 2021.
Should the Republican party hold these two seats, they control the US Senate and will make life tough for Joe Biden over the next four years with a possible return to the likes of fiscal cliffs and government shutdowns.
However, should the seats be won by the Democrats, the Senate will be a 50-50 tie. And in a voting tie, Vice President Harris will hold the deciding vote. So, we wait for the results of the Georgia run-off elections to decide who will ultimately control the US senate and therefore the likely make-up of government policy for the next four years.Â
Biden has already announced strong measures to tackle coronavirus the day after he takes office. This is seen by Biden, and the rest of the world, as an important first step.
If the Democrats gain Senate control, we expect Biden to undo some of Trump’s most controversial policies, including those to do with climate change as well as tax cuts and various deregulations the Trump administration legislated and enacted via executive order. Read more about Biden’s platform HERE.
Should the Republicans retain Senate control, Biden has said he’ll work towards bipartisanship. However, with Trump out of power but still the dominant Republican force, it remains to be seen just how co-operative Republican Senators will be and if the second term of the Obama administration is any guide, this will be a continuation of partisan politics as has become the norm.
Regardless of the Senate outcome, markets expect the Biden government to behave far more moderately than Trump. Â This has somewhat eased market volatility.
The expected stimulus from Biden into the US economy will likely keep interest rates in Australia lower, which could contribute to slower growth here. Re-introduction of regulation in the US may also drive cost of funding up in financial services, threatening profit growth in that sector here. On the upside a recovering US economy will encourage global consumer confidence and in lieu of other unexpected market events help foster growth.
The outcome of the election will have some impact but given what we’ve experienced over the last 12 months, with so many other issues at play (our current relationship with China being an example), the U.S. election is just one of the many things we need to keep an eye on. Â
While all indications are promising, there’s still a lot yet to be decided.
Australia’s continued run of low interest rates means the hunt for yield (income) will remain with us for the foreseeable future Economies where COVID-19 has been brought under control are gradually returning to growth, and with anticipated vaccine release over the first half of the year, it would be reasonable to expect this across most major economies.
Overall though the key tenets of investment remain the same, patience, discipline, diversification and asset allocation that is suitable for you.
