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 US$597.7 billion. 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 $2 trillion spending package for healthcare reform and expansion as well as $2 trillion for a green jobs programme and $775 billion 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.
Billionaire investor warns market could crash
“Will Joe Biden beat Donald Trump in November? I don’t think so. I’d bet against that. I think the polls are very, very squishy because of the highly toxic political environment in which we live,” according to DoubleLine Capital’s billionaire boss Jeffrey Gundlach, who predicted Donald Trump’s win in the 2016 election.
Then again, Gundlach didn’t think Biden would win the Democratic nomination, having called him “unelectable” in March. Regardless, there are still “a lot of twists and turns” to come, added Gundlach.
As for the market, he said he wouldn’t be surprised if stocks revisited their March lows, and he forecast gold to keep moving higher. He expects "significant" volatility, usually the case close to a presidential election.
"I expect much greater volatility around the election as the so-called progressive policies of tremendous increased deficit spending for basically wealth manipulation could get pretty heated,” Gundlach said during a webcast for his firm DoubleLine Capital's closed-end funds.
-- Uttara Choudhury contributed to the article --