The economic impact of US presidential elections
US presidential elections are an uncertain time for markets, because people want to know who is going to occupy the world’s most powerful office. Learn about the economic impact of US elections – including on USD, stocks and gold.
How does the US political system work?
Before we assess each candidates’ policies and the effect that they might have on the economy, it’s important to run through how the US political system works, because a president is not solely responsible for determining economic policy.
The US has a bicameral political system, made up of the House of Representatives and the Senate – collectively known as the US Congress. House members serve for two years and there are 435 seats available – with all seats up for contestation every two years.
Senators serve for six years, and there are 100 seats available. Roughly one-third of the seats in the Senate are up for election every two years. There is currently no limit to how many terms a member of the House or Senate can serve.
These two institutions represent the legislative branch of government, and they’re responsible for drafting, debating and ultimately voting to approve or reject laws. The president on the other hand, represents the executive branch of government – which is responsible for enforcing the laws of the Federal Government.
The separation of these two branches of government is an integral part of the separation of powers in US politics.
For reference, the third and final branch of the US government is the judiciary, which is responsible for interpreting the laws. The judiciary holds huge sway in American politics – especially the Supreme Court. This is particularly true for controversial issues in the US like abortion (Roe vs Wade 1973), gun control legislation (District of Columbia vs Heller 2008) and social equality (Bostock vs Clayton County 2020).
Usually, a single party – Democrat or Republican – will control a majority of the seats in either the House or the Senate. Some years, one party can control both. This is where it gets tricky for presidents, because a Democratic president can find themselves confronted by a Republican-controlled legislature, or vice versa for a Republican president. This scenario greatly reduces a president’s ability to get their legislative proposals and promises that they made on the campaign trail approved.
How the different candidates’ policies might influence the economy and markets
Now that we’ve established how the political system in the US works, it’s important to state that a presidential candidate’s promises on the campaign trail might be harder to implement than first thought.
So, it’s worth remembering that while the policies proposed by each candidate at the moment might affect the economy in one way or another, these policies are not certain to be approved. That said, we’ve outlined some of the candidates’ main policy proposals below.
Donald Trump’s policies
US President Donald Trump’s policies are what many political and economic analysts would call protectionist – which is a political attitude that seeks to shield domestic industries from foreign competition, often by placing tariffs on imports.
In this respect, Trump’s policies have been characterised by his ‘America First’ strategy, which puts American manufacturers and producers at the forefront while imposing higher tariffs on foreign companies.
With that in mind, here are some of the incumbent’s policies for this election cycle:
- Create ten million new jobs in ten months
- Create one million new small businesses
- Cut taxes to boost take-home pay and keep jobs in America
- Enact fair trade deals that protect American jobs
- Tax breaks for products that are made in America
- Bring back one million manufacturing jobs from China
- No federal contracts will be granted to companies that outsource to China
- Cut prescription drug prices
- Provide school choice to every child in America and teach American exceptionalism in schools
- Pass legislation to implement Congressional term limits
It’s not unfair to say that Trump’s policies are geared towards the economy, American manufacturers and Wall Street – which could mean that markets will rise if the incumbent remains in office.
Under Trump the Dow, S&P 500 and Nasdaq have all achieved record peaks, while unemployment fell to its lowest point in almost 50 years – dropping to 3.5% in January 2020. This feeds into the current administration’s tendency to champion Trump as a ‘jobs president’.
Joe Biden’s policies
Joe Biden is the Democratic candidate, and the party’s platform this year has been partially shaped by progressives such as Bernie Sanders. Biden has had to expand his platform to attract these voters, and his expansive list of policy proposals is evidence for that.
His platform is catch-all, and it encapsulates many of the problems currently facing America – from gun reform and the opioid epidemic to the environment.
With that in mind, here are some of the policy proposals from the Democratic contender:
- Ensuring that no one would pay more than 8.5% of their net income for health insurance
- Committing to raising the minimum wage in America to $15 an hour
- Ban the manufacture and sale of assault weapons and high-capacity magazines, and buy back those already in circulation
- Combat the opioid epidemic by making effective prevention, treatment and recovery services available to all through a $125 billion federal investment
- Create one million new jobs in the American auto industry
- Spur the construction of 1.5 million sustainable homes and housing units
- Increase corporation tax to 28% from the current level of 21%
- Raise taxes for anyone earning over $400,000 a year, plus issue a commitment that those who earn less than $400,000 will pay no new taxes, which applies to roughly 91% of Americans
- Launch a national effort aimed at creating the jobs needed to build a modern, sustainable energy infrastructure and deliver an equitable clean energy future with a $2 trillion investment
- Achieving net-zero emissions for the entire US by no later than 2050
Biden’s policies are geared towards human needs like committing to a $15 minimum wage and investing in America’s infrastructure, while also increasing taxes for those at the top. So, markets might look less favourably on a Biden presidency than a Trump presidency, but the outcome remains to be seen.
Current estimates are that Biden’s complete tax package will raise between $3.5 trillion and $4 trillion over the course of ten years.
The economic impact of the election
Historically speaking, election years have provided a boost to the US economy, but due to the Covid-19 pandemic and subsequent economic shutdown, this year is slightly different to the norm.
At the time of writing (24 September 2020) Biden was the preferred candidate, which means that the balance could tip away from the incumbent reassuming office.
The markets will likely be uncertain as a result. Plus, as Biden is a Democrat and given his tax plans, it’s likely that there will be an increased anthropocentric approach to economics – meaning a greater focus on human needs – rather than the business-focused approach of the current administration.
Markets might look unsatisfactorily on this, especially after four years of Trump’s fiscal friendship with corporate elites and Wall Street.
US elections and volatility
US elections usually cause increased market volatility, especially if the outcome is uncertain. Heading into November 2020, Biden is the leading candidate in a number of national opinion polls. But keep in mind that markets also favour the re-election of the incumbent, so Biden’s election could cause wider market volatility rather than stability.
That said, opinions can change quickly. Betting odds on 2 September 2020 had Biden on 50 points and Trump on 49.5. But, just a month earlier, Biden held a lead of 60.7 to Trump’s 36.7. Slightly over a week later, on 11 September 2020, Biden had etched back up to 53 against Trump’s 46.2.
The VIX had been heading steadily downwards since May 2020, but it began to spike up towards the end of August and early September. This is a possible indicator that the markets are jittery around a clear-cut election result in November, and the prospects of a Biden victory.
How will markets react to the US election?
See how the US election could impact the strength of USD, the value of US stocks and the price of gold in the sections below.
The US dollar could weaken on the back of a Biden victory, because he’s widely seen as being less focused on the markets than Trump. But, if key markets fall on a Biden victory, USD might actually rally in the short term as investors turn to USD and its haven status.
A Biden victory could cause market uncertainty to increase, especially since Trump has geared his policies towards the stock market and job creation. The incumbent will often tweet when the Dow or another key US index passes a major milestone, helping to increase his reputation as a ‘jobs president’. But Biden’s policies on the environment, public services and infrastructure could see shares like renewables, industrials and materials rise.
If Biden wins, gold could increase in price given his tax policy and the possible stimulus that this could provide to the US economy. Biden’s fiscal policy, which is geared towards greater debt, could also provide a boost to precious metals as investors turn to gold as a haven in which to store their capital until markets become more certain.
How to trade the US election
We offer a wide selection of spot forex pairs, including many of the leading USD crosses. To trade the US election with us, follow these steps:
- Research the forex pair you want to trade
- Keep track of opinion polls for the predicted winner
- Create a trading account
- Choose whether to go long or short, depending on whether you think a currency will strengthen or weaken
- Open and monitor your spot forex position
You can trade the US election with us by speculating on the price of spot forex pairs. There are two ways to do this: by going long or short. You’d go long to speculate on spot forex prices rising and you’d go short to speculate on prices falling.
First though, let’s discuss the basics of a forex pair and what it means to go long or short. A forex pair is always made up of two currencies, one is known as the base and one is known as the quote. The base currency is always the one on the left and the quote is always the one on the right. So, in the EUR/USD currency pair, EUR is the base currency and USD is the quote.
The price given for a forex pair is how much of the quote currency it would take to buy one unit of the base currency. A higher price means that the quote currency is weaker relative to the base currency, because you’d need more of the quote to buy one of the base.
For example, if you wanted to take a position on the EUR/USD currency pair, you’d go long if you expected the price to rise and short if you expected it to fall. In this case, a rising price indicates that the USD is weakening compared to the EUR, because more USD is required to buy one unit of the euro base currency in this pair.
Conversely, if the price of this pair was falling it would indicate that USD was strengthening compared to EUR, because fewer US dollars would be required to buy a single euro.
US elections summed up
- The US presidential election is taking place on 3 November 2020 – as are elections to the House of Representatives and the Senate
- The result is currently set to place Joe Biden in the White House, but the result is causing market instability, and bookmakers have slashed their odds on his supposed victory
Uncertainty around the eventual winner willis likely to cause greater market volatility, with the USD and USD, gold and the Dow will allother currencies likely to be affected in some way– particularly USD crosses
TradeYou can trade the volatility on these andspot forex pairs with a range of other markets by openingtrading account
- Create an acoount now to get started
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