US election: the final countdown

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Registered: ‎04-11-2016

US election: the final countdown

I tend to think of myself as a bit of a political junkie – generally speaking there’s nothing better than a good election. But I have to admit I’m pretty much over this one. This has been a somewhat bizarre campaign characterised by two of the most disliked presidential candidates in US electoral history. It has made the election campaign all about who was going to get to November 8th as the least disliked candidate. That’s not a particularly lofty aspiration and has contributed to a campaign that has focused largely on misogyny and inappropriate use of emails.

The good news is that by the middle of next week US voters will (barring legal challenges and the unlikely event of a tie) have a President-elect. But will it be Mr or Madam President?
 
The presidency: too close to call?
A week is certainly a long time in politics. A week ago a Clinton victory looked assured. In fact, markets started to fret about the possibility of a Democrat ‘clean sweep’ (winning the presidency, the Senate and the House of Representatives). Worry about Mr Trump's wall and trade protectionism was replaced by worry that some of Mrs Clinton's less business-friendly tax and regulatory policies would be enacted.  
 
With the FBI's renewed focus on Clinton's emails, the polls have closed up and it's game on. That is, at least with respect to the popular vote. But winning the popular vote does not always win you the presidency - just ask Al Gore. In the 2000 election Mr Gore won 48.4% of the popular vote to George W. Bush's 47.9%. 
 
What ultimately matters is the share of votes won in the Electoral College. As if the US electoral system was not complicated enough, when voters choose their preferred candidate at the ballot box they are actually voting for electors to represent their state. Those electors make up the Electoral College and are equal to the number of House of Representative seats in each state, plus their two Senators. Across the country that adds up to 538 and hence the magical 270 electoral votes needed to secure the presidency.
 
In 2000, Mr Gore might have won the popular vote, but President Bush won the majority of electoral votes (271 to 266, with one abstention), though only after taking the Florida result all the way to the Supreme Court.
 
Who wins the presidency in 2016 will come down to who wins a handful of ‘swing’ states of which the most critical are Florida (which carries 29 electoral votes), Ohio (18) and North Carolina (15). Clinton is polling ahead of Trump in most swing states, though that is before the full impact of the latest FBI announcement has been reflected in the polls.
 
While not ignoring that qualification, it appears Mrs Clinton should still retain the ‘favourite’ tag to become the 45th US President. The race for the popular vote will be tight, but Mrs Clinton is expected to pick up enough electoral votes to claim victory. That said, Mr Trump's chances improve significantly should he pick up any of those larger swing states.
 
Importantly, some 24 million people have already availed themselves of early voting and cast their ballots. Early voting seems to have been most popular in some of the swing states. One report suggests four million votes have already been cast in Florida. Many of these votes will have been cast before Mrs Clinton's latest email problems.
 
Congress
The Republicans currently hold a 54/46 majority in the Senate. The Democrats appear likely to pick up Senate seats, the question being whether they pick up the four or more required to take back control of the Senate. Four is enough as in the event of a 50/50 tie the Democrats would hold the majority as the tie-breaker goes to the party of the President. That of course assumes a Clinton victory. Neither party appears likely to achieve the filibuster-free majority of 60 votes (google “US Senate cloture” if you want to know how that works!).
 
The House of Representatives appears likely to remain in Republican hands. While they will likely lose ground to the Democrats, the 30 seat gain in the 435 seat House seems a bridge too far right now. The Democrats could get close enough to make taking control of the House a viable outcome in the mid-term elections.
 
Scenarios
The most likely outcome is for a Clinton Presidency and for the Republicans to retain the House and probably the Senate. This is the most benign outcome for markets, but only because it means less likelihood of anything changing!
 
The Clinton ‘clean sweep’ scenario always seemed a bit too difficult to achieve, especially given the gains required in the House. This outcome has a low probability.
 
If Mr Trump wins, it seems likely that both the Senate and the House would remain in Republican hands. In that case we would rely on the more conservative Congressional Republicans to curb some of Mr Trump's populism, and in particular rein in his protectionist tendencies and fiscal largesse.
 
Timing: when will we know?
Polls close in most states at either 7.00 or 8.00 pm local time. How quickly votes are counted will depend on how tight the races are, but will be helped by the large number of early votes. Some estimates suggest 40% of votes may be cast before election-day. Traditionally the result is known around midnight (US Eastern Standard Time) on election-day or late Wednesday afternoon. Particularly tight states may take longer and delay the final result.
 
A final interesting fact: if no candidate secures the 270 electoral votes needed to become the president (an admittedly low probability outcome), the top three candidates are sent to the House of Representatives for their deciding vote for president. Remember we expect the House to remain in Republican control ... 
 
Market implications
The best outcome for markets is for the status quo of Democrat President with Republican congress (House and probably Senate).  
 
A Trump victory would be a ‘risk off’ event with shares down and stronger safe-haven assets (bonds and the US dollar). Following a settling down period, markets would then need to assess what is actually likely to change, including the extent to which Congress, alongside a good dose of economic reality from the lobbyists that will be knocking on the White House door, can be relied on to curb some of Mr Trump’s more populist tendencies.  
 
And remember volatility is not always a bad thing. It might provide smart long-term investors with the opportunity to buy some cheap assets.
 
The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.
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