Financial markets and the economy have shown interesting historical correlations between the Democratic and the Republican rule but in either case, volatility is unavoidable. The US will conclude its 59th quadrennial on November 3, 2020, one of the most unconventional US presidential races ever owing to the ongoing pandemic as a number of people are opting for postal votes. Joe Biden and Donald Trump are the leading candidates from Democrats and Republicans respectively.

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In a recent report, brokerage house Edelweiss Securities noted that historical data has proved that Democrats fare better for the economy, with average growth 100 bps higher at 3.8 percent.

It added that they are also more trade-friendly, with US imports showing an average growth of 5.8 percent versus 1.7 percent in the Republican tenure. Corporate profits, employment and compensation growth also show relatively better growth rates under Democrats.

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However, the paradox is Republicans are perceived as being market-friendly. If ‘middling economy and low-interest rates’ are the market positives that drive up the valuations, Republicans have an upper hand, Edelweiss stated. The inflation and interest rates are firmer under Democrats.

"Dollar is usually weaker under Republicans resulting in the outperformance of commodities over equity and emerging markets over the US. A big threat that looms from a Democratic victory is that there could be some reversal in a reduction of corporate income tax which will be negative for equity

markets," the report explained.

It is important to note that in the immediate near term, volatility will remain elevated until the election outcome.

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As per the brokerage, the historical analysis reflects that post a crisis, the first six months of a new President witnesses a contraction in equity markets of about 10 percent versus a contraction of 4 percent for Presidents that do not follow a crisis. Therefore, some market correction cannot be ruled out.

Edelweiss also noted that the odds of winning have turned favourably towards the Democratic candidate, Joe Biden.

"Coronavirus mismanagement seems to have heavily weighed on the prospects of the Republican victory, with current stats by Predictit forecasting a 66 percent chance of victory for the Democrats," Edelweiss observed.

It further observed that data stands to testify that October polls have a very accuracy ratio of over 80 percent and Democrats have won the elections if shown in the October polls. Also, the chances of the US to bet on an incumbent candidate post a recession is low, thus the currently available statistics are unanimously reflecting on a Democratic win over the Republicans, it added.

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(Edited by : Abhishek Jha)

First Published:Nov 3, 2020 2:54 PM IST