Although the US remains embroiled in a trade war with China and investors continue to pay close attention to the Federal Reserve, one event that is likely to dominate market sentiment in 2020 is the country’s presidential election. 
The election of Donald Trump as president in 2016 shocked many who thought his unconventional campaign and populist message would fail to gain ground against the more establishment figure of Hilary Clinton. But Trump did win the day and the country now has its eyes on the next election campaign.
Since Trump took office in early 2017, the S&P 500 has been the global stock market with a total return of 47.50 per cent (in dollar terms to 20 December) thanks to market-friendly policies such as deregulation and tax cuts from the Trump administration.
Performance of S&P 500 and MSCI World under Trump
Source: FE Analytics
This outperformance continued in 2019, with the US market posting a 29.63 per cent total return compared with 26.65 per cent from the MSCI World.
Cormac Weldon, manager of the Artemis US Select and Artemis US Smaller Companies funds, suggested the strong performance of the US market in 2019 – despite political and economic worries as well as the ongoing trade tensions with China – make it even more challenging to forecast what lies in store for 2020 but pointed out that politics will play an important role.
“While investors have got used to the Republican brand of populism embodied by Trump, they are increasingly considering the possibility of a more left-wing version embodied by Democrat candidates Bernie Sanders or Elizabeth Warren,” he said.
“At this point, the more moderate Joe Biden is still leading the Democratic race. If he wins the nomination, polls currently suggest that he would defeat Trump in November 2020. If that were to happen, the market would need to digest the end of Trump's deregulation and market-friendly policies and consider whether it outweighs the ending of his trade wars.”
Weldon added that a victory for Trump would be positive for stock markets while a win for Biden would be neutral. The picture is more complicated for the other Democratic hopefuls but the manager claimed that if Warren were nominated, her current policies make her “unelectable” so the market impact would be negligible.
“However, it's still early days and many things can change before the nomination is confirmed next summer,” he said. “We will know more in early March, after the so-called ‘Super Tuesday’ of Democratic primaries.”
Stuart Cox, manager of the £218.4m Jupiter North American Income fund, the potential policies of both the Republican and Democrat parties could have a “profound impact” on the equity market, especially for sectors such as healthcare, banks, technology and energy.
“The positive omen for Trump is that no president has ever lost re-election with unemployment this low. Today, the unemployment rate in 10 key battleground counties is well below the national average,” he added. “On the other hand, Trump’s approval rating is unusually low for someone who presides over such low unemployment and a record-high stock market.”
The candidate for the Democratic Party is not yet known. However, more clarity will be gained through the primaries from mid-February to ‘Super Tuesday’ on 3 March and investors will be able to gauge the strength of the presidential candidate – likely Warren or Biden – and details of their most important policies.
Both the Republican and Democrat parties are likely to have policies that address healthcare costs for the state and the individual, looking at issues such as cutting drug prices, expanding government-controlled health plans, and disbanding Obamacare. Some of these risks have already been discounted by the equity market, shown through the fact that healthcare has been one of the worst performing sectors in 2019.
Cox also said the banking sector is another that would have heightened volatility should the Democrats launch policies that strengthen capital, liquidity or leverage, and to rebuild regulatory walls between commercial and investment banking. Furthermore, a Democrat policy to reverse Trump’s 2018 tax cut would likely weigh on bank shares while Republican policies that are seen to boost the economy – such as further tax cuts – would be positive for the sector.
“I am reviewing holdings that could be positioned in a ‘win-win’ scenario with both parties touting constructive rhetoric. Such examples include changes to the individual tax system, such as a Republican-imposed cut in individual taxes, or a Democrat-imposed wealth tax,” the manager said.
“While it appears likely that Trump will be re-elected in 2020, the election outcome could prove to be closer than currently expected. However, regardless of the outcome, I will strive to exploit opportunities and manage risks as they arise, and I believe strong fundamentals are likely to win the day.”
Jeff Schulze, investment strategist at ClearBridge Investments, agreed that the US presidential election and slowing economic growth across the world means that volatility is likely to remain elevated in 2020, although he does not believe that a market drawdown is imminent.
“In fact, over the last 19 US presidential election cycles, stocks have suffered losses just twice in the 12 months leading up to election day, delivering an average return of 8 per cent,” he said.
“Equities have also tended to do well in periods following a yield curve inversion, especially if no recession occurs, rising 13.5 per cent on average in the subsequent 12 months. The 2-year/10-year US Treasury yield curve inverted in August, suggesting that stocks could climb through most of next year.”
While cyclical stocks have recently been boosted by the easing of the Federal Reserve’s monetary policy, Schulze argued that this rally could be short-lived as the manufacturing side of the economy does not appear to be “out of the woods yet”.
“Instead, the likelihood of continued volatility in 2020 steers us to high-quality growth companies with strong moats around their businesses and more defensive areas of the market that have tended to hold up well during turbulent periods,” the strategist continued.
“Consumer staples and utilities should continue to lead unless we see a clear resolution of the trade war and improvement in global growth.”