Generally, history has shown a Democrat victory means lower market returns in the year leading up to the elections, as worries about the party's anti-business rhetoric drive fears. But the markets soon realise that getting campaign pledges passed through the House and the Senate are not so easy, and the reality of a Democratic president ends up being much better than feared. As a result, in subsequent years market returns tend to improve.

The reverse is true for a Republican presidential win.

So while uncertainty about the electoral outcome remains high, and may even weigh on returns in the short term, that uncertainty will fall regardless of the eventual outcome. Statistics do show, however, that second-term re-elections help markets to perform better, as there is less uncertainty about policy directions and markets can expect 'more of the same'.

In the run-up to the selection of a Democratic candidate, levels of uncertainty around a Democrat win were particularly high, with leading contenders standing for a range of choices from those who want to burn the party down (Sanders) to someone wanting to buy the party (Michael Bloomberg) - and seemingly everything in between.

Nonetheless, it is likely that markets will take heart from a known risk, being Trump, versus the reality of an extremist being gridlocked and unable to carry out major campaign promises; a situation not dissimilar to that which Trump has faced.

A challenging backdrop

What is different this year is that the US is battling the impact of the Covid-19 pandemic, both in terms of the loss of human life as well as the significant economic fallout associated with the crisis. What started the year as a distinctly China-centric phenomenon, was - by March - a truly global pandemic, leading to a distinct and dramatic hit on real economic activity.

From a market perspective, however, a global recession triggered by a China slowdown and spreading virus impacts would mean a rush for safe haven assets. This is likely to be a narrow choice of US Treasuries, the US dollar, gold and the Swiss franc. Other opportunities are already presenting themselves, with energy prices (and oil in particular) having already fallen substantially, as have copper and steel prices.

We do know that China has already started implementing a number of measures to support and kick-start their economy, and central banks around the world (including the US Federal Reserve) will inevitably do whatever it takes to create recovery conditions. In areas where policy rates are already low, such as the Eurozone, a global recession would probably tip such countries into undertaking fiscal stimulus. The major beneficiary of this will be on the stocks side, as a paucity of yield and return in fixed income asset classes, combined with an excess of liquidity, will lead to an increase in risk-seeking behaviours.

A Trump win?

In the longer term, a Trump win means a return of the economic conflict playing out between the US and China, which has as its proxy the so-called trade war. Tangential to this is also the technology war, visible most clearly in efforts by the US to prevent China-based tech company Huawei from gaining a foothold in Western economies.

A win for Trump would also be interpreted as a signal for a more hard-line approach and the so-called phase one trade deal announced towards the end of 2019 will be seen inevitably for what it really is: a temporary respite and a truce of sorts. Political and economic expediencies will most likely lead a Trump administration to continue pushing China harder, until some concessions are gained.

All considerations taken together and 2020 seems to hold the potential for big market moves as a number of unknowns converge simultaneously in the second half of the year. Coming on the back of a 2019 in which equity markets delivered stellar results, this is unlikely to be the case for the remainder of this year. With existing high market valuations and earnings growth possibly significantly lower, the stage is set for a rocky road ahead.