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by  Eric Lascelles Nov 4, 2020

As presidential votes continue to be counted across the U.S., Chief Economist Eric Lascelles shares an election update. He notes Trump's outperformance in Florida and other southeastern states and identifies a Republican Senate as the most likely outcome. Lascelles also provides an update on the policy agendas of both candidates and the impact of election uncertainty on financial markets.

Watch time: 10 minutes 33 seconds

View transcript

Hello, and welcome to this special election U.S. videocast.

My name is Eric Lascelles. I’m the Chief Economist for RBC Global Asset Management. And this long anticipated and utterly unprecedented U.S. election race is now complete, but as we record this at least, the tallying is not yet done. The results are tentatively surprising in being a whole lot closer than expected. And whereas polls, betting markets, and models had universally predicted a fairly large Biden win, Trump has been outperforming expectations, yet again, as he did four years ago.

That’s not to say that Donald Trump has won the race. He has gained some notable states, including Florida and a number of other must-win states, from his perspective. But the main point is, at this point, the race is proving much closer than expected, and the betting odds have swung truly extraordinarily over the span of the last 12 or so hours.

And so for instance, on the evening of the election, as the initial results came out, as Florida for instance, began to tilt toward Donald Trump, we saw betting markets assigning as high as an 80% chance of a Trump win; essentially the reverse of what the expectations had been going into the election.

That’s since substantially reserved, though. And so as of at least the morning of November 4th, we can say markets now assign a 79% chance of a Biden win. So there’s been quite extraordinary reversals going on here. At this point in time, Biden again is considered more likely to win, but still well short of certain.

And at this juncture, it comes down to a handful of very close states that have not yet fully reported. Those do include Pennsylvania, Wisconsin, Michigan, Nevada, Georgia, and perhaps you could argue Arizona as well. In fairness, when we look at betting markets, Biden is expected to win all of these, and so some are thought to be fairly likely to go strongly toward Biden. Arizona has been given a 95% chance, but others are much, much closer. And so, for instance, Georgia is thought to have a 57% chance of going to Biden, and certainly that’s the kind of state that could then go ultimately either way.

It’s also hard to forget Joe Biden’s serial underperformance in this election so far. He went in with polling leads on the order of 8 or 9 percentage points ahead of Trump and, of course, those have ultimately proven to be just a handful of percentage points here and there.

The State of Pennsylvania looks as though it will be especially pivotal and close. Betting markets currently give Biden a 63% chance there. But equally, the actual polling or the actual results are so far showing the opposite, and so hardly done. Pennsylvania may not have its full results until the end of this week, and so clarity may not come for some time.

And it’s worth just reminding everyone that incomplete state results are probably less useful than they usually are because it really depends on where the remaining votes are coming from. And so, for instance, if it’s the early ballots that are not being counted, the mail-in ballots, then that may well mean that the remaining votes could skew heavily toward Biden. If it’s the actual election day ballots that haven’t been counted yet, that in all likelihood skews toward Trump.

And so we can’t assume that a ballot is a ballot and that 80% of the result is known, that we have a pretty good flavour for the final 20%; it could well be quite different. So a lot of uncertainty there up until the point when virtually all of the votes have been counted.

The closeness of this election certainly increases the risk that the election is contested, and so that would delay the results by days or even weeks. It’s perhaps worth remembering that back in the year 2000 that election results was not clearly resolved until mid-December; it took over a month to properly sort that out. And we’ve already seen some complications in the sense that President Trump has tentatively declared victory, arguably prematurely, asserting election fraud, and threatening to take the matter to the courts.

And so just really making the case to the extent this is a close election. Even if we have a pretty good flavour for how it ultimately plays out, there will perhaps be some lingering doubt as these issues remain.

And then looking for a moment beyond the presidential race and recognizing this was an election for senators, and representatives, and beyond, it looks as though the status quo will mostly prevail. Democrats may have picked up a seat in the Senate, but the Senate should remain in Republican hands. That’s contrary to market expectations going into the election—83% chance that the Republicans hang on to the Senate. And then from the flip perspective, the House of Representatives considered still very likely to remain Democrat. So a divided Congress likely to persist.

In terms of the policy outlook, well if Donald Trump manages to win, I suppose it’s mostly status quo in the sense that he would continue on the current trajectory. He did not propose bold, new ideas during the campaign and so more of the same for the most part. But still substantially different than a Biden presidency and so still quite relevant.

I think it’s important to say, Trump has proposed tax cuts. He has proposed some fiscal stimulus, though less aggressively than the Democrats have. One might imagine that deregulation would continue. The isolationist trajectory probably would also persist in terms of limiting immigration and impeding to some extent international trade. And it’s fair to say that the federal government would likely have a softer hand or a lighter hand as it pertains to COVID-19.

Also worth recognizing that if Trump wins this election, there isn’t a third election to win four years later, and so he would be unencumbered by future election worries. It could create a bolder policy agenda, though in what direction it’s not quite clear.

Of course let’s appreciate right now, betting markets actually think Biden is somewhat more likely to win. And so Biden is fundamentally a moderate Democrat. He’s not a radical. He wouldn’t be looking to tilt U.S. policy aggressively in any direction, but he would be further to the left than Trump, to be sure.

The Democrats have been proposing quite significant fiscal stimulus, and so potentially providing a bigger economic pop. Also higher taxes, though, and perhaps more regulations. And so less attractive in that sense from a corporate perspective. And probably more aggressive COVID-19 restrictions; something that might limit growth in the very short term but could ultimately be a good thing to the extent the virus gets controlled to a better extent somewhat later.

Biden might also be more in favour of immigration; might allow a somewhat more favourable international trade environment. And I suppose when we tally all of this up, what we’ve been thinking, and indeed I think this is consistent with market views, is that a Biden presidency might be a net economic positive versus a Trump platform. But certainly there are nuances, and not every corporation in particular would agree, given some of the tax and regulation implications. But let’s not forget that a divided Congress does very much limit bold action.

In terms of financial markets, well, financial markets have tended over the last few months to view a Trump win as being bond yield-negative and stock market-negative. And then conversely, as you might imagine, looking at Joe Biden winning as bond yield-positive, stock market-positive. And so I think that is the way to view this. And we don’t quite know how ultimately it will land at this point, but there is certainly nuance to that. It’s not cut and dry. Not every sector will feel the same way.

And again, keep in mind that a divided Congress limits the action of either party. And in fact, that divided Congress might well be viewed as a negative by financial markets, to the extent it reduces the prospect of a big, coherent fiscal stimulus from one party or the other.

Maybe the other financial market thought is just that we are still seemingly in this period of high election uncertainly. And so long as that endures, whether for the remainder of the day or for the remainder of the week or, in a worst-case scenario, for the remainder of the month perhaps, it could well impede financial market risk-taking over that period of time.

Let’s recognize that this election is of consequence, not just to the U.S., but also to the world. The relationship between the U.S. and China, the world’s two superpowers, is to some extent at stake. The degree to which the U.S. continues its isolationist course and conversely supports or doesn’t support multinational institutions is to some degree at stake as well. Climate change policy is in the mix. And, of course, the U.S. may or may not take a leadership role in that regard. And also, the U.S. foreign policy stance, of course, has a consequence for the foreign countries that are involved therein. Now I should say, despite the very high importance of this election, there are arguably more important things going on out there in the world today. And so as much as we pay very close attention to this and it is near the top of our list of key macro risks and key macro themes, let us ultimately appreciate that COVID-19 is still going to be the more important issue over the next year. Clearly, there’s some interplay between the two. They are not completely distinct entities. But nevertheless, there are other items that are more important for markets and the economy, and so we should perhaps recognize that.

And equally recognize there is a natural pendulum effect over the long run in any kind of political environment. And so when voters push particularly far in one direction, usually there is then a temptation or a tendency to swing back over time in the opposite direction, ultimately landing in a more centrist role. And so even as elections differ from expectations or swing away from the centre, over a period of years or even decades, usually you can count on some reversal subsequently.

And then in terms of how results have been so far from this election. I guess I should say, pollsters really did get this quite badly wrong. And so they may yet ultimately have picked the right president. Biden is thought to be somewhat more likely than Trump at this point, and that was the original prediction. But my goodness, the numbers have not looked all that much like what pollsters were predicting, and so they have egg on their face, and I suspect in four years’ time we will not be giving them a very heavy weight at all, having now failed on several fronts.

And then ultimately let’s recognize we will learn considerably more over the coming days. To reiterate, at this point in time a narrow Joe Biden win is considered the most likely outcome, paired with a divide in Congress. But there is certainly a path to victory for Trump as well, and so this isn’t the final word on the subject.

I hope you found that interesting. Hopefully we learn more in the coming hours and days. And I wish you well with your investing.

Thank you so much.



Read our latest U.S. election insight.

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Publication date: November 4, 2020

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