Nearly two centuries ago, a little-known American politician running for his state’s Senate seat quoted the Biblical warning that “a house divided against itself cannot stand”.
Abraham Lincoln was right, of course, even if he lost that election and could not save his country from plunging into a civil war that led to some 750,000 deaths.
Today, the American people may be more sharply divided than at any time since the 1861-65 civil war.
Those divisions – over coronavirus, income and racial inequality, climate change and immigration, to cite just a few examples – are mirrored by a government that is just as polarised.
Looking ahead to the country’s election on November 3, the key outcome for the economy and markets will not be the winner of the race between Donald Trump and Joe Biden.
Instead, it will be if the US continues to be led by a divided government or if voters deliver a unified government – with the same party controlling the House of Representatives, the Senate and the White House.
As history shows, divided US governments tend to face gridlock, while unified governments hold the promise of significant policy change.
While the economy has come out of the deep hole of the first half, no US president has been re-elected in a year of recessionary conditions since 1952. Mr Biden currently leads Mr Trump in the polls by a wide margin: about 10 percentage points nationally, though by a narrower margin in likely swing states.
A Biden presidency, on its own, would come with different medium-term priorities, including higher income taxes on top earners and higher corporate taxes, increased infrastructure spending, a public healthcare option, a significant focus on sustainability and a less confrontational approach to global trade.
- A divided US government results in gridlock
- The make-up of Congress would affect Mr Biden's ability to enact policies, were he to win
- Market performance will likely depend on the ability to contain the virus
However, if the composition of Congress remains unchanged – with a Republican-controlled Senate and Democratic-majority House – Mr Biden would struggle to translate those priorities into legislation.
Consequently, the country’s economic and market outlook would most likely remain broadly the same, although increased regulation could put pressure on pharmaceutical, financial, energy and technology stocks.
A Democratic sweep, by comparison, would see higher state spending, especially on infrastructure projects, supporting faster growth.
The US dollar would weaken, and the yield curve would likely steepen, though only moderately, as the Federal Reserve would cap any interest rate increase. Higher corporate taxes, of course, would impact earnings.
However, surveys of voter intentions could be skewed by a misrepresentation of preferences. Anecdotally, this appears possible with candidates outside the mainstream. Notably, as we saw with the US election four years ago, today’s polls may not be fully accurate.
Even if those polls are accurate, they only represent how people say they intend to vote today and not necessarily how they will vote on November 3.
There is no way to reliably predict how intentions will translate into action. Betting markets likely reflect assumptions on what people think will happen, based on their assessment of what others will do.