The Winner Takes It All
The United States Presidential elections come closer and closer by the day and will be the driver for financial markets in the coming weeks. The world simply waits to see who will win the White House and the Congress – the dollar’s faith depends on the outcome.
Various scenarios circulate about how the market will react in the case of a democrat or republican win. It is not only the White House but the Congress control that is at stake. With over two million Americans already casting their vote, the market counts the days until November 3rd before making a decisive move.
USD Scenarios To Consider
Trump promised a historic tax cut if he will be re-elected. Before discussing the tax cut’s implications, let us focus a bit on the re-election thing. Any President acts differently during the second mandate when compared to the first one. The idea is that during the first mandate, some of the measures taken consider the second term possible re-election. But during the second term, the decisions are not biased anymore.
So Trump promised a massive tax cut, but its implementation depends on who is winning the Congress. A divided Congress will likely see a stimulus package of about $2 trillion to help the economy cope with the pandemic. But a republican Congress will likely deliver the tax cut on top of the stimulus package.
However, a Trump win is seen as bullish for the USD. The explanation comes from the foreign policy – the U.S.-China trade war brought uncertainty for so many years, and whenever uncertainty dominates, the USD outperforms its peers.
A Biden win and a Democrat Congress results in an even bigger fiscal stimulus package. Market chatter indicates that $3 trillion or more will be pumped into the economy, with the focus being on infrastructure programs, green projects, and so on. Such an outcome will likely lead to a lower USD in the long run as Biden will likely correct the foreign policy decisions during Trump’s first mandate.
One thing is common – trillions of USD will hit the market, in a historical fiscal expansion program.
A recent statistic indicates that 20% of all USD into existence were created in 2020. Yet, we still talk about trillions of new USD to be invested in the following years. If this is not frightening, from both a fiscal and monetary policy point of view, nothing is.
How will the stock market react?