The US has often found itself on the edge of the abyss, with the country seemingly beyond rescue, but still managing to get back on its feet every time. The question is whether this will happen again in the midst of a health crisis, deep recession and social tensions, or whether things really are different this time. Naturally, the upcoming congressional and presidential elections in November also play an important role.
The US may like to present itself as a shining example to countries worldwide, but the political system has often resulted in elections that did not proceed smoothly – to put it mildly. In the 1800 presidential elections, Democratic-Republican Thomas Jefferson had to take on incumbent president and Federalist John Adams. Jefferson chose Aaron Burr as his vice president candidate as Burr enjoyed great popularity.
At the time, the person who received the most electoral votes in the electoral college became president, while number two became vice president. Jefferson and Burr gained 73 votes each. This forced the House of Representatives – where Federalists held sway – to vote who would become president. Thirty five rounds of voting were required before Jefferson emerged as the winner – partly due to an intensive lobby from Alexander Hamilton, who loathed Jefferson, but found Burr completely unsuitable as president; he said about Burr that he “loves nothing but himself—thinks of nothing but his own aggrandisement”. A few years later, Burr – still VP at the time – would shoot Hamilton in a duel. Yet the US proved strong enough as a unit to endure these western-like scenes.
Sixty years later, elections would contribute greatly to splitting the country. Abraham Lincoln was very unpopular in the South, to the extent where the Democrats in the South split off from the party and produced their own presidential candidate. Lincoln ultimately won only 40% of the popular vote, but still became president through the electoral college. This led to the secession of South Carolina, followed by six other states not long afterwards. This resulted in the Civil War. But America survived even this.
Will we shortly be able to add the 2020 elections to the list of illustrious elections that are still mentioned generations later, but which did not break America? All the stories about Trump having to be removed from the White House by the military if he loses seem unlikely to us.
In any event, Trump had imagined a very different run-up to his possible re-election. He believed that he could boost his campaign with historically low unemployment, sky-high stock markets and an economy that continues calmly and stoically. This was until the corona pandemic threw a spanner into the works.
The Trump administration’s approach to the corona crisis has been anything but well received by the American people and the streets have been flooded with protests for fairer opportunities for black people and police reforms. Although the country is unanimous in some respects when it comes to racism and police brutality, we should not overestimate this solidarity. For example, in June there was a gap of 60 percentage points between Republicans and Democrats in the view that systematic racism in police actions is a bigger problem than vandalism and violence in protests.
Trump now tries to project himself as a Richard Nixon, focused on law and order. The riots and demonstrations following Luther King’s assassination in 1968 drove some of the voters into Nixon’s arms; the Republican candidate campaigned with a law and order approach. Another example is the major riots in Los Angeles in 1992; they initially led to more sympathy for progressive views in the polls. A year later, however, LA residents elected a Republican mayor for the first time in 36 years.
Indeed, we should be careful with predictions because of these examples, but the comparison with Nixon falls short in many respects, for example because Nixon was the challenger and Trump is the sitting president. All the misery is unfolding under his administration now, whereas Nixon could blame eight years of Democratic mismanagement. Nixon presented himself as the man who would bring peace and stability; Trump is an instigator of unrest and instability.
In addition, Nixon had it easier, as the electorate was far less ethnically diverse than it is now. In 1968, 90% of voters were white; this year the figure is probably around 66%.
In addition, the 1968 Democratic candidate, Vice President Hubert Humphrey, was thwarted by his own Democratic President Lyndon B. Johnson who, for a variety of reasons, seemed to hope that Nixon would win instead of the candidate from his own party.
All in all, the BLM issue creates problems for Trump rather than increasing his electoral opportunities. In addition, Trump has made a poor impression on the majority of voters in the corona crisis, a weak economy does not help a sitting president’s chances, and his approval ratings have bottomed out now. We also see spectacular turnarounds in the betting markets: by the end of May, they still believed Trump clearly had the best odds of spending another four years in the White House; at the start of July, Biden – with 61% – is believed to have the best chances against Trump – 39%.
Democratic presidential candidate Joe Biden is leading in the polls in more than a handful of those states that are likely to make a difference in November. Combined with the increasing likelihood that the Democrats will also secure the Senate in addition to the House, it is therefore quite possible that the Democrats will dominate the three houses next year (PredictIt put the chance at about 60% at the start of July).
Major asset managers worldwide see a triple Democratic victory as one of the top three risks to the markets. The two bigger risks are, in their view, a second major corona wave in the autumn and persistently high unemployment. Of course, these three risks are interrelated.
If the Democrats end up fully in charge in Washington (apart from the Supreme Court that errs on the conservative side), the markets will indeed initially react negatively, which includes the prospect of higher taxes, an increased focus on the breaking up of companies, expensive social programmes, more regulation and so on. More specifically, the tax cuts for companies in 2017 (the Tax Cuts and Jobs Act) will be at risk in this case, for example.
However, the ‘damage’ to the markets and the economy may turn out to be less than expected in the event of a Blue Wave: the left wing of the Democrats has lost power and not a single Tea Party-like movement is so strong that it can pull the party very far to the left. In addition, Biden has endorsed a neoliberal policy for decades and, as president, he will not suddenly adopt an overly progressive approach. In addition, it may well be favourable for the US economy in the longer-term if the pendulum swings slightly to the left, as inequality and the share of earnings in the economy have taken on forms that require correction to restore the balance.
We would therefore not be surprised if an initially negative reaction to a Biden victory from the stock markets were soon tempered. If the Senate stays in the hands of the GOP, the stock markets are certainly likely to quickly swallow their disappointment. Historically, stock markets have fared better under a divided Washington than under a Washington where one of the parties dominates the White House, Senate and House.
Importantly, even if America is taking severe knocks now, investors and analysts should be careful not to write off the US. It is written everywhere that the political chaos and divisions in the US are unique and very severe, but storms and social divide have been basically commonplace in US history and America has always dealt with it.
For now, the combination of political and social division and poor management of the corona crisis makes the US seem fragile, and we can well imagine reluctance among investors. Also, because US equities have offered outperformance for years. This outperformance is insufficiently supported by real, underlying economic developments. The markets are therefore likely to mark time, but do not make the mistake of thinking that America will freeze in its tracks.