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US presidential election 2020 – the dice have yet to be cast

February 19, 2020

reading time: 8 minutes

by Ikram Boulfernane, Financial Economist LGT Capital Partners

The buttons promote the 2020 US presidentieal elections.

Electors, Super Tuesday, swing states – this jargon will surround us up until November 3rd. The date marks this year's political event par excellence: the US presidential election. This is reason enough to get an overview of the US electoral system.

This year, Americans – or at least those eligible to vote – are heading to the ballot box to elect their new leader to the White House. The campaign is already in full swing. In addition to the President, the Vice President, all 435 seats in the House of Representatives, and 35 out of 100 Senators are up for election.

Two-party democracy

The US Constitution says nothing about political parties. Candidates therefore do not have to be party members. But in practice, only candidates with the backing of a party have a chance of being elected President. US institutions have been dominated by the Democrats and Republicans since the 19th century.

The Republicans are entering the race with incumbent President Trump – at least according to various forecasts. The Democrats’ choice of candidate will only become clear after the primaries and caucuses. Several people will apply to become the party's candidate and will need to win the favor of the grass roots, who will put their trust in the final candidate. The aim is to unite the broadest possible population group behind a single person to avoid any division of voters.

The Democratic primaries have started in February in Iowa. The political circus continues through the middle of the year, and who Trump’s opponent will be should emerge during this period.

Primaries or caucuses are held in each of the 50 US states as well as in the District of Columbia, and the US territories. Registered voters in the primaries vote directly for the candidate they think delegates in their state should back at the National Convention in the summer of the election year. In the caucuses, eligible voters elect local delegates who then elect delegates for the National Convention over several successive rounds.

Journalists in a media center follow Donald Trump at an election rally.

During the so-called Super Tuesday primaries or caucuses for candidacy are held simultaneously in several states. Most delegates are elected on this day, so it is important for presidential candidates to do well then to ensure successful nomination as their party’s candidate. Presumably, there are 50 primaries and seven caucuses scheduled. The last elections of the Democrats will be held on June 6 in the US Virgin Islands. The final presidential candidate of the party should be decided in July 2020.

Electoral college – the decisive force for us elections

US citizens do not elect the President directly, but indirectly via an electoral college made up of 538 electors. States with a larger population have more votes, but each state has at least three votes. The electors undertake to elect a specific candidate. The candidate who receives a majority of at least 270 electors wins the presidential election.

The "winner takes all" principle applies in 48 out of 50 states, meaning the winner gets all electoral votes for that state. Maine and Nebraska assign their electors using a proportional system. If no candidate receives the majority of electoral votes, i.e. they have 269 votes each, the Twelfth Amendment to the US Constitution applies. In this case, the newly elected House of Representatives votes for the President, and each state has only one vote. Results can differ between the popular vote and the electoral college – as happened in 2016.

Swing states – the battleground

The election results can be predicted relatively accurately in many states, but not in the swing states. Neither the Democrats nor the Republicans have a structural majority here. Each state has two Senators. Those states that send both a Democrat and a Republican to the Senate tend to be swing states.

The voters in these states often decide who will take the White House. If the trends from 2012 and 2016 elections continue, Arizona, Maine, Minnesota, Nebraska’s second congressional district, New Hampshire, North Carolina, Florida, Michigan, Pennsylvania, and Wisconsin will be swing states.

Investors and the risks of the elections

As a rule, national elections only affect international investors to a limited extent. But the US presidential election is different. The US dominates international financial markets: It accounts for some 55% of the MSCI All Country World Index, its Treasury bond yield is a global benchmark for the valuation of various asset classes, and the US dollar is used in 88% of currency transactions around the globe. US politics currently appears to be the main risk for market participants, and this is reason enough for investors not to ignore this presidential election. 

Various polls are forecasting Trump's re-election. The prosperous US economy is the best campaign aide for the current President, and a recession in 2020 does not appear to be on the cards. The Trump Administration ensured economic momentum and higher profits for S&P 500 companies with its tax reform. In the event of re-election, it can be assumed that the corporate tax situation will remain the same.

The closer it gets to the elections, the more likely it is that there will be market volatility.

Things would look different if a Democrat were elected – particularly one from the progressive wing of the party, such as Elizabeth Warren or Bernie Sanders. Higher taxes and stricter regulations – leading to a deterioration in market sentiment – would come as no surprise. It should be noted at this point that these types of projects can only success with backing from Congress, which requires a Democratic majority in the legislative branche. Positions would also remain entrenched in the trade war with China if the Democrats were to win.

While the dice have yet to be cast in the race for the US presidency, there are indications that Donald Trump will not hand over power in the next four years. Nonetheless, investors are advised to adopt a selective approach and equip their portfolio for various scenarios. The closer it gets to the elections, the more likely it is that there will be market volatility. Diversification is therefore the order of the day.

Photos: KEYSTONE-SDA / AP Photo / John Locher.

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