In all the turbulence today it might be easy to forget that there's a Presidential election going on in the US. A wealth management house considers the investment and asset allocation implications of the polls.

In taking a much-needed break from the industry preoccupation with COVID-19, this publication is pleased to share these thoughts from Lombard Odier on the implications of the upcoming US Presidential election in November this year. While the economic disruption may affect the result, there are, we shouldn’t forget, many other moving parts in play. There are significant tax implications, for example, from what sort of result happens in November. Here are thoughts from Stéphane Monier, chief investment officer at Lombard Odier & Cie. 

The editors are pleased to share these insights and invite readers to respond. The usual editorial disclaimers apply. Email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

The race to challenge Donald Trump for the White House in November has narrowed. Joe Biden, vice president to Barack Obama for eight years, staged a political comeback last week by winning ten of the 14 state nominations decided on “Super Tuesday”. That sets up Mr Biden as the Democratic leader in the contest, but may be the start of months of mudslinging.
 
Donald Trump, Joe Biden, Bernie Sanders. The choices for president before American voters in the months ahead have rarely been so politically diverse, despite all three main candidates being white men in their seventies. 

Just a month ago, Mr Biden, who first made a presidential bid in 1987, placed fifth in the New Hampshire primaries on February 11, 2020 and found himself written-off as a Democratic contender. Last week, Mr Biden won six states by wider margins than forecast, as well as states such as Texas and Massachusetts that forecasters expected rivals to win. That gives Mr Biden 664 of the 1,991 state delegates needed to secure the nomination, compared with Mr Sanders’ 573. Another 352 delegates will be decided in a further six states on March 10, 2020. 

Until Super Tuesday, so-called because the day sees one third of Democratic Party delegates vote, senator Bernie Sanders led the field. Mr Sanders did win California, Colorado and Utah, plus his home state of Vermont. California’s size, with 415 delegates, more than half of which were won by Mr Sanders, makes it likely that he will contest the nomination all the way to the Democrats’ July convention where the candidate is finalized. 

The initially diverse field of Democrat candidates lost four campaigners last week when they withdrew from the race: Mike Bloomberg, Pete Buttigieg and Amy Klobuchar, all of whom have since endorsed Mr Biden. Mr Bloomberg’s resources and reiteration that his priority remains to unseat Mr Trump, will surely make a difference to Mr Biden, who did not spend a campaigning dime in the five states he won last week. Elizabeth Warren finished third in her home state of Massachusetts and, at the time of writing, had not endorsed either remaining candidate. 

Left or center?
The choice for Democrats is between traditional centrist politics, or more radical reform. Mr Sanders, characterized as appealing to more young voters, is campaigning on a promise to provide universal healthcare, a minimum wage, cancel student debt, provide free public college and university tuition, federal job guarantees and a “Green New Deal” to tackle carbon emissions. “We have options out there that will pay for that,” he said recently, including higher taxes. Specifically, he has called for higher tax on capital gains, and a raise in the corporate tax rate from 21 per cent to 35 per cent. 

Mr Sanders is a longstanding critic of globalization, free trade agreements and their impact on American workers. Nevertheless, compared with the current administration, we would expect trade tensions under Mr Sanders to lessen. Still, higher corporation and wealth taxes, “medicare for all” and tighter banking supervision would not only be difficult to pass through a split Congress but would also be interpreted as a challenge to corporate profitability and perhaps make US assets less attractive. The short-term impact on the dollar would be negative. 

Mr Biden’s campaign presents a pitch for a return to political normalcy after nearly four years of bitter partisanship under Mr Trump. Mr Biden would be the most predictable president for markets. He is campaigning on a platform that would reverse Trump’s withdrawal from multilateral commitments including trade, return relations with China to a more predictable path and re-engage with Iran over nuclear proliferation. He would almost certainly show more respect for the Federal Reserve’s independence. Domestically, he is also likely to strengthen the existing Affordable Care Act, known as “Obamacare”. 

Mr Biden has also called for an increase in the corporate tax rate to 28 per cent, less than Mr Sanders, and to end the lower tax rate treatment for capital gains and dividend income. 

A Mr Biden presidency would be likely to make the dollar less vulnerable to political interventions from the White House, and leave the currency reacting more to the health of the US economy, safe-haven flows and monetary policy. 

Either Democrat in the White House would be limited in efforts to pass legislation by a Republican-held Senate. Historically, such a mix of Democrat president and Republican-majority in the Senate tends to lead to a focus on economic fundamentals and so prove dollar positive. 

Polling data now suggests that Mr Biden stands a better chance of beating Mr Trump in November than Mr Sanders, with an average lead of 5.5 points, compared with a 4.7 points lead in a Sanders-Trump election. 

If nothing else, the Democrats appear united in their “Anyone but Trump” determination to oust the incumbent, and a consensus that he will be hard to beat. While Mr Trump has low approval ratings, his support is sticky. That may allow him to repeat his feat of four years ago by earning a second term, despite failing to attract a majority of votes nationally.

Economic outlook
A second term for President Trump might see a continuation at some level of the trade tensions that have characterized his first four years. It is also likely that he would choose a more dovish successor to Jerome Powell, who is half way through a four-year term at the Federal Reserve. 

Clearly, as the spread of the coronavirus continues, all economies will feel its effects. Markets’ reaction to the implications of the coronavirus added to pressures on the Federal Reserve to act, shortly after a G7 statement on March 3, 2020 that committed policymakers to use “all appropriate policy tools” to safeguard economies from a slowdown. The same day, the Fed abruptly cut its policy rate by 50 basis points to 1.25 per cent. The timing of the meeting and the scale of the cut signaled the Fed’s determination to respond to the coronavirus, and before an economic shock on consumer confidence, which may pose a recession risk to the US. 

The Fed’s decision is likely to be the first of a series of announcements from central banks in the coming weeks, which will be key to reducing the chances that the coronavirus shock tips the global economy into recession. 

At this stage, we estimate that the impact of the virus will slow gross domestic product in the US to an annualized 1.5 per cent in 2020, compared with our expectations earlier this year for annual growth of 1.8 per cent.

Side effects
As the economy slows and attention is focused on the coronavirus, American voters may be attracted to the more familiar politics of Mr Biden. And the epidemic may continue to affect this presidential election. 

Any worsening of the virus may simply stop candidates from campaigning in public, and limit voter turnout on election days. More likely, any slowdown would undermine Mr Trump’s argument that he can be trusted to steer the economy. We are already seeing the current administration challenge scientific understanding and play down the scale of the outbreak. Last week Congress approved an emergency bill worth $8.3 billion, including funding for vaccine research, to tackle the virus. 

Once the coronavirus peaks, and markets begin pricing-in the likelihood of the next US president, whether Mr Trump or one of the two Democrat candidates, we expect some volatility on the news flow. Especially if the Democrats’ nomination process turns into a bruising fight between Mr Sanders and Mr Biden until July, similar to the 2016 Sanders/Clinton run-off. 

Market attention
For now, markets are focusing more on the evolving coronavirus story and oil markets after the collapse of the production cuts agreement between OPEC and Russia than pricing scenarios for the US election. While the presidential outcome is important, only the unlikely prospect of a win by Mr Sanders would deliver additional market jitters. 

In the current environment, our portfolios are overweight US Treasuries, as they can provide both yield and a cushion. We continue to watch political and virus developments carefully, and believe that investors should be sure to include adequate instruments in their portfolios to manage the downside risks.