According to Time Magazine, 49% of the world’s population are due to cast a ballot this year[1]. In total citizens of 64 countries are going to exercise their fundamental right to decide who will govern them. All elections are important, but the US presidential race is especially important. In the paragraphs that follow we attempt to answer two questions; 1) who is likely to win and 2) how will markets react.
Don’t write off Biden just yet
Polling as a discipline, if one can call it that, has serious defects[2]. In what is shaping up to be a tight race, Donald Trump is ahead of Joe Biden in the polls. Is there any alternative framework with which to analyse public opinion and voter preferences, which might yield better results?
Allan Lichtman is a Professor of History at American University. In 1981 Lichtman with the help of a Russian geophysicist named Vladimir Keilis-Borok created a methodology for predicting US elections. Together they formulated thirteen statements that armchair pundits should answer to determine the likely outcome.
Using this ‘Keys to the White House’ system Lichtman has called the outcome of every election correctly except one. In fact, Lichtman correctly forecast the Trump presidency in 2016. The pollsters did not. The scoring works like this[3]:
‘When five or fewer of the following statements are false, the incumbent party is predicted to win the election. When six or more are false, the incumbent party is predicted to lose’.
The statements are:
- Party mandate: After the midterm elections, the incumbent party holds more seats in the U.S. House of Representatives than after the previous midterm elections. FALSE
- No primary contest: There is no serious contest for the incumbent party nomination. True
- Incumbent seeking re-election: The incumbent party candidate is the sitting president. True
- No third party: There is no significant third party or independent campaign. False, Robert Kennedy is polling around 10%
- Strong short-term economy: The economy is not in recession during the election campaign. True
- Strong long-term economy: Real per capita economic growth during the term equals or exceeds mean growth during the previous two terms. True
- Major policy change: The incumbent administration effects major changes in national policy. True, for example The Inflation Reduction Act, CHIPS Act etc.
- No social unrest: There is no sustained social unrest during the term. True, the campus protests were probably not significant enough
- No scandal: The incumbent administration is untainted by major scandal. True, Hunter Biden’s misdemeanours have not tainted his father
- No foreign/military failure: The incumbent administration suffers no major failure in foreign or military affairs. True
- Major foreign/military success: The incumbent administration achieves a major success in foreign or military affairs. False, unless you count the support of Ukraine and Israel
- Charismatic incumbent: The incumbent party candidate is charismatic or a national hero. False
- Uncharismatic challenger: The challenging party candidate is not charismatic or a national hero. False, Trump is very charismatic
The basic insight here is that elections tend to favour the incumbent because a certain degree of political inertia exists. People don’t like change and unless something is broken, they have no incentive to do anything.
If you share Robert De Niro’s opinion that Trump is worse than a pig[4] or have concluded that Biden is a walking corpse, then nothing is going to change your mind. However, it is undecided voters that determine the outcome, and they care about performance. For these folks, some combination of the thirteen statements will be decisive and it’ll boil down to this ‘have Biden and the Democrats done an okay job’. Thus far and with a few months to left in the race we think they have, just.
Business as usual…
Yes. However, all bets are off if the US economy enters a recession before election day. Poor economic performance will really damage Biden’s chances of retaining the White House. The economy is a key pillar of the framework. For the time being the US economy is still strong and whilst there are emerging signs of weakness it is probably not yet time to necessarily be concerned. Markets dislike uncertainty and four more years of Biden is business as usual.
What if Trump wins…
Chinese and European leaders will probably not cheer this outcome. Trump is likely to be tougher on China than Biden is and will also continue to insist that the other NATO members spend more on defence. To say that Trump is controversial and says whatever he wants is to state the obvious. Unscheduled and unscripted pronouncements from Washington about economic matters might create market volatility. Particularly if these are directed at the Fed.
Summary
In the long term, the business-friendly environment that has made the United States exceptionally successful is not likely to change based on who has the top job. In the more immediate future, a second Biden administration is probably going to be associated with less uncertainty.
[1] The ultimate election year: https://time.com/6550920/world-elections-2024/
[2] Why polling is often wrong: https://www.bostonglobe.com/2024/04/03/opinion/why-are-presidential-polls-wrong-biden-trump/
[3] Lichtman (2020) Predicting the Next President Chapter 2
[4] Robert De Niro continues criticism of Donald Trump: https://www.nme.com/news/film/robert-de-niro-donald-trump-pig-dignity-2590482
