Trump tests positive – but should it matter to investors?

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MEDIA RELEASE: The breaking news that President Trump has tested positive for Covid-19 has injected an additional level of uncertainty into the 2020 US presidential election. Markets reacted negatively to the announcement, with global stocks falling sharply.  

We spoke to three of Schroders’ investment experts to get their take on today’s news and the market implications:

Johanna Kyrklund, Group Chief Investment Officer and Global Head of Multi-Asset Investment: 

“Markets have a tendency to overreact to daily news around elections, as can be seen today following the news of President Trump’s Covid-19 diagnosis.

“For investors, this short-term volatility can cause nervousness, but the best response at times like these is often to just sit on your hands and do nothing. Political trends that have serious investment implications tend to play out over months and years, the rest is just noise.

“While the US election is clearly a major political event, in investment and economic terms it’s a sideshow in comparison to the pandemic.”

Piya Sachdeva, Economist: 

“It is only weeks until the election and Trump now needs to isolate. This could well impact his ability or – at least – effectiveness to campaign and also puts a question mark over the second presidential debate. As this comes at a time when the polls and betting markets show it’s Biden’s to lose, this could potentially help Biden at the margin.

“There are also various new scenarios introduced. For example, what happens if this significantly impacts Trump’s short-term health, and he has to go to hospital? Or could his illness be something Trump could point to as grounds to contest the election result?

“We have already highlighted various uncertainties surrounding this election. It is a fairly close race; we don’t know exactly when we will get the result; and it could be contested in some shape or form.”

Sean Markowicz, Global Strategist:

“Barring a serious deterioration in Trump’s health (or Biden’s), this is unlikely to have a significant impact on the US election outcome. Presidential debates seldom change voter preferences and this time should be no different.

“The market’s negative reaction can be interpreted as a sign that Biden’s odds to win the election have increased. On average, stock prices have fallen by 2.7% in the final three months before an election whenever the incumbent political party lost, but have rallied by 6.5% if the incumbent party won (see chart below).

“With US equities up only 3.3% so far, overall it seems that investors still feel uncertain about which political party is most likely to win (although the sharp downward move today will have detracted from the figure).

“Nevertheless, investors should not assume that a Biden win would be unequivocally bad for markets. For example, our previous research found that the difference in long term US equity returns under Democratic versus Republican presidents was virtually zero. So party affiliation is not irrelevant, but its significance is often overstated.

“After all, presidents do not operate inside a vacuum and there are many other factors that can influence markets such as valuations, interest rates, inflation and oil prices, among other things.”