US Elections: what are the tail risks?

A couple of weeks ahead of the US elections, we look at the potential tail risks for financial markets. First, we observe recently two facts: Biden’s lead moved from 6.5% in September to something closer to 10% as we are writing and the Trump campaign is missing financial resources while the Biden campaign does not feel the same pressure at all.

Of course, we cannot just file the election as a done deal.

The main reason is that the fraction of voters who will vote by mail will increase substantially this year and Trump has been laying for months now the pretext that mail-in voting provides too many opportunities for fraud. State agencies and lower courts are adjusting their rules to make it easier to vote by mail while higher courts are reversing those decisions. Both create excuses to challenge the results ex-post. We believe there is a 10-15% chance that the presidential election tightens to the point that each camp could claim for victory and asks authority to reverse elections results. Of course, one person will take the oath of office on January 20th, but who that will be could be unknown till mid-January. Adding to the fact that in such scenario, the new President will appear illegitimate by about half the country, we see this plausible outcome as a clear tail risk for financial markets.

In the more likely event of a Biden win and Democratic senate, it is known that policy won’t be capital friendly. Indeed, Biden plans to:

  • Raise corporate taxes back to where they were before the 2017 cut
  • Raise taxes on US corporations operating overseas
  • Tax capital gains as ordinary income (above USD 1mio)
  • Establish a minimum tax on book income
  • Raise the marginal tax rate on those earning over USD 400k per year.

Of course, we can expect more than USD 2tn Covid- relief package with a big infrastructure bill including spending on green-energy projects and an expansion of Obamacare which might counter-balance market sentiments. Nevertheless, Biden also plans to reinstitute regulations. House Democrats have recently explored antitrust issues to Internet giants. Given their heavy weights in the US indices, the S&P 500 and the Nasdaq indices could face some selling pressure. This scenario can also be seen a atail risk.



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