Post-summer thoughts on the US Presidential election

It has already been an eventful build up to the US Presidential election. Now that Labor Day has passed in the US, markets will become ever more influenced by shifts in the perceived probabilities regarding who will win. In this edition of InFocus, Daniel Murray assesses the latest polling data.

Overview

It has been a remarkable turnaround for the Democratic Party in this year’s US Presidential election campaign.

Following the televised debate between Trump and Biden on 27 June, Trump’s lead in the polls surged, making him the outright favourite. Trump’s victory odds improved even further after the failed attempt on his life on 13 July. At the peak on 15 July, PredictIt was pricing a Trump win with a probability of 69% (see Figure 1).

Given such long odds in favour of Trump, what followed is therefore impressive. Joe Biden announced his withdrawal from the election on 21 July with Kamala Harris filling his shoes a few days later. The gap between the Democrats and the Republicans then narrowed rapidly and meaningfully, such that most polls now put Harris ahead in the national vote.

However, US elections are not won or lost based on the vote across the whole country but rather on the results in a few key states. The reversal in this regard has been similarly dramatic. Whereas on 21 July Trump was ahead of Biden in all seven swing states,¹ as at the time of writing (5 September) Harris is ahead in five and Trump’s lead in the other two has fallen considerably (see Figure 2). Trump’s average lead in the swing state polls on 21 July was 4.4%. Trump now lags Harris by an average of 0.8% in those same states. PredictIt currently puts the probability of a Harris win at 53%.

Risks and opportunities

Analysts often think about elections in terms of the investment implications of the different candidates. With regards to this year’s US Presidential election, neither candidate has released much detail on their proposed policies, making it difficult to form a view as to how each candidate would impact markets if elected. Much of the commentary and analysis is therefore based on broad conjecture associated with statements each has made and what has been published in the media.

Furthermore, even if there existed more detail on the candidates’ policies, the ability to enact legislation depends on the need for support from both chambers of Congress.² In the unlikely event that one party controls both the House and the Senate and wins the Presidency, any majority in the Congressional chambers is expected to be small. A Senator or Representative might vote against a bill sponsored by the President even if from the same party, for example in response to concerns within their local electorate, and prevent its passage through Congress.

¹ The swing states are those US states in which the polls are the closest and the result could go either way.

² The United States Congress consists of a lower body, the House of Representatives, and an upper body, the Senate.

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