Biden’s election momentum and financial markets

According to a Pew survey on 12 April, 65% of Americans think Trump responded to Covid-19 too slowly. The same poll also found that 52% believe he is pretending the situation is better than it is, while 8% feel he is over-exaggerating the seriousness of the situation. As the cases and deaths in the United States climbed to the largest in the world as of early June, popular opinion of Trump’s handling of the coronavirus declined accordingly, with 43.1% approving and 54.6% disapproving, according to an RCP poll of polls on 8 June. The slide in his disapproval rating was most noticeable among senior citizens, and it is no coincidence that Biden has taken the lead in Florida, Pennsylvania and Arizona, which are ranked second, eight and tenth in population, respectively, based on older voters in the United States. This was a key voting block for Trump in the 2016 election. 

On Trump’s handling of race relations, 63% of voters disapproved while 31% approved, according to a CNN poll on 5 June. Trump has tried to position himself as a ‘Law and Order’ President to regain public opinion. However, this approach is failing in the face of a tectonic shift in the urgency to eradicate racial injustice. The murder of George Floyd at the hands of Minneapolis police officers on 25 May fueled nationwide protests. According to a Monmouth poll, 57% of Americans -- including 49% of whites -- agreed that police were more likely to use excessive force against African Americans. In contrast, following the death of Eric Garner in the hands of New York police in 2014, which also triggered national protests, just 33% of Americans -- including 26% of whites -- agreed.

In addition to minorities and supporters of social injustice, three major groups of voters are contributing to Biden's lead, and may ultimately determine the next winner: senior citizens, white woman and independents. In Monmouth and Quinnipiac polls,Biden leads each of these groups, which Trump carried in 2016.

As of 10 June, Trump’s overall approval-rating average was 42.6%, according to RCP, and 41.0%, according to FiveThirtyEight. Both numbers are the lowest Trump has registered since October 2019.

Is the economy Trump’s ace card?

Despite poor opinion survey numbers and a dramatic plunge in the US economy, Trump still holds on to one potential bright spot. His economic approval rating remained positive as of 10 June, with 51% approving and 45% disapproving his performance on the economy, according to RCP. His polling numbers on the economy have remained relatively high so far during the pandemic and protests, even as the economy collapsed. Potentially, this gives Trump an opening to recover some ground, with 75% of voters considering the economy its number one issue.

Trump’s broad and consistent strength on the issue of the economy is in sharp contrast to the weakness of Biden’s ‘enthusiasm gap’. According to a CNN survey, 60% of Biden supporters are casting a ballot against Trump, and only 37% ‘for’ Biden. The same survey found that 70% of Trump voters are motivated in support of their candidate.

A game changer: could Senate democrats edge closer to control?

At the beginning of the year, the GOP (Grand Old Party, Republican Party) was overwhelmingly favoured to retain control of the Senate, according to Predictit, the online market for betting on politics. However, by May, that perception had evaporated, when market expectations shifted to favouring a small majority for Democrats.

Democrats need to win three Senate seats to break a tie vote if Biden wins, and they need four seats to break a tie if Trump is re-elected. Republicans have an uphill battle to retain control of the Senate. They are defending 23 seats to 12 for Democrats. Democratic challengers have outraised incumbent Republican Senators by an amount of $237.5 million versus $220.0 million, according to OpenSecrets as of 10 June. Democratic challengers are polling strongly in ten states, including four states where they are ahead or near the margin of error. There is only one Republican challenger leading an incumbent Democratic senator, and that is in Alabama. In this polarised era, the United States is witnessing less ticket splitting, where voters pull the lever for one party for President and another for the legislative branch. If Senate races are influenced heavily by the Presidential contest, Democrats have the edge.

Implications for US fixed income

The odds of a Democratic sweep have risen significantly, but fixed income markets are not yet focusing on the potential investment implications of a dramatic political regime change. As we close in on November, we expect heightened volatility in global financial markets, including US fixed income, as investors consider the impact of Biden’s policy agenda. In particular, in the case of increasing odds of a Democratic sweep, the likelihood of tax increases will be discounted.

Biden endorses a series of higher personal income and capital gains taxes, alongside curtailment of tax deductions, which may present challenges to the outlook for consumption, as the economy continues to open up across industries and the nation. As well, corporate earnings are likely be factored in. Absent a Senate majority, re-regulation is possible via executive order, and the burden of its expense will present headwinds to the economic outlook. Social, infrastructure and green initiative spending will provide offsetting stimulus, perhaps at the expense of fiscal discipline. With the election still five months away, there may be time for Trump to close the monumental lead held by Biden. This outcome largely rests upon job growth and economic recovery.

It is with the keen understanding of the risk posed by the US Presidential election outcome, along with geopolitical, social, and health uncertainties, among others, which investors must be discerning in building fixed income portfolios. Careful credit selection is critical, identifying companies with strong balance sheets, financial flexibility, resilient business models and ample liquidity. Diversification is also critical within corporate bonds and other fundamentally stable sectors, such as securitisations across residential, consumer loans, and select commercial loans. We believe US Agency mortgage bonds and TIPS can be good substitutes for richly valued US Treasury bonds to provide a stable of liquidity in portfolios. With an unknown administration taking office after the election, and the unpredictability of fiscal policy and the path of economic recovery, interest rate risk is best neutralised.

US equity sectors in the wake of a Biden win