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Investment manager warns of double-dip US recession in event of Trump election victory

Fidelity International strategist Wen-Wen Lindroth said the US president's re-election in November could also present downside risks from “growing civil unrest, political instability and potential for continued poor management of the [coronavirus] crisis"

Fidelity International - Investment manager warns of double-dip US recession in event of Trump election victory

The re-election of Donald Trump to the US presidency in November carries a risk of a double-dip recession and an erosion in the confidence of American assets, according to an election outcome analysis by Fidelity International.

Fidelity is an investment management services firm that offers a mixture of funds, shares, exchange-traded funds (ETFs) and investment trusts to investors and manages assets worth £457.3bn. The group also provides six of its own North American-focused funds to customers.

Wen-Wen Lindroth, Lead Cross-Asset Strategist at Fidelity, said polling and betting markets were currently estimating a 40% probability that Trump will be re-elected to the presidency alongside a dividend Congress, essentially a continuation of the current situation in Washington DC.

“The most likely outcome for Congress in this case is for the Senate and House to remain in Republican and Democratic control, respectively, with McConnell and Pelosi continuing as majority leaders”, Lindroth said, adding that such an outcome will also present a downside risk from “growing civil unrest, political instability and potential for continued poor management of the [coronavirus] crisis, which increases the risks of a double-dip recession in the US”.

As a result, Fidelity said the risk of an erosion in market confidence in US-focused assets will increase in such a scenario.

Democratic sweep most likely outcome

While a Trump victory was moderately likely, Fidelity estimated that a more likely outcome, with 50% probability, is a sweep of the presidency and both houses of Congress by the Democrats and their nominee Joe Biden, which in turn will bring the possibility of a government spending boom to help rejuvenate the US economy.

“Biden’s spending proposals are currently close to US$5 trillion and growing”, Lindroth said, highlighting that the former vice-president’s campaign has already announced a US$2 trillion spending package for healthcare reform and expansion as well as US$2 trillion for a green jobs programme and US$775bn for child and elderly care.

“In terms of funding, we would expect the government to look the other way on deficits for several years, until unemployment returns to pre-[coronaviurs] levels. If Biden’s policies proved successful, the combination of expansionary fiscal and monetary policy would effectively reflate the real economy”, the strategist said, although they added that inflation could appear “in a meaningful way” in late 2022 into 2023.

“While markets may initially baulk at a Democratic sweep due to the party’s association with higher taxes and more regulation, we think investors would eventually start to price-in the effects of a combination of greater fiscal largess and monetary expansion, which should ultimately lead to higher consumer confidence and support for risk assets”, Lindroth concluded.

Biden win and dividend Congress least likely

Finally, Fidelity said the least likely outcome, a Biden presidential victory but with a dividend Congress as Republicans retain control of the Senate, is a 10% probability and will likely results in what Lindroth dubbed a “skinny New Deal”, referring to the economic stimulus measures implemented by former president Franklin D. Roosevelt to lift the US economy out the Great Depression in the 1930s.

“The impact of such policy on the real economy and financial markets would probably resemble the last 6 years of Barack Obama’s administration, in which he presided over a divided Congress: gradual (slow) repair in unemployment and wages and strong returns in the financial markets, with the latter supported by low interest rates and limited ability for Democrats to push through tax hikes – or more bluntly: a positive outcome for Wall Street but less beneficial for Main Street”, Lindroth said.

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