The bizarre twists of fate that have delayed a winner being determined in the US presidential election do not prevent us from drawing a number of important conclusions about the political future in the US.
First, we know the result of the election in the Senate and the House of Representatives. The Republicans have only narrow majorities in both the House and the Senate – and this matters because members of Con gress often do not toe the party line.
Second, whoever the new pre sident turns out to be, he will not have a strong popular mandate.
As a result, the most lik ely outcome of a Republican sweep will not be so different from the divided government that financial markets have enjoyed for the last six years – a period when the public sector has been restrained from interfering unnecessarily in the private sector.
If Bush wins, promised tax cuts are likely to be implemen ted somewhat more quickly than in the event of a strict divi sion of power between the presidency and Congress, as in a Gore victory.
All else unch an ged, this would imply somewhat looser fiscal policy and, hence, tighter monetary policy than otherwise.
In practice, tax-cutting legislation is unlikely to be pas sed until mid 2001 and imple mented before late 2001 at the earliest. Moreover, the very narrow Republican majorities in Congress suggest it is most unl ikely that radical new measures will be approved.
As a result, our macro forecasts for 2001, which already inc orporate a fiscal loosening, will remain unchan ged regard less of who wins the presidency.
A Bush win would be a short-term negative for the Trea sury market since it would imply a somewhat tighter Fed stance and less rapid shrinkage of public debt than under the alternative election scena rio.
Nonetheless, both candidates have pledged not to borrow from big projected social security surpluses.
Very big federal surpluses are likely to accrue over coming years. Our central assum ption is that federal surpluses will total around $1.1trn over the next five years, regardless of whether Bush or Gore wins.
Importantly, as highligh ted above, the very slim Rep ublican majorities in Congress will prohibit fiscal laxity.
Despite the potential for tax cuts, there will still be a huge reduction in the $3.4trn supply of marketable bonds outstanding over coming years. Any rise in government bond yields should be short lived and the fiscal background will also continue to encourage yield curve inversion and cre dit spread widening.
Since our 2001 economic forecasts will be unchanged, any change in profits forecasts would need to reflect changed attitudes towards companies or shareholders.
In this context, Bush is more favourable than Gore but a finely balanced Congress will greatly dilute any differences.
While any Bush-induced rise in bond yields should theoretically lead to a lower valuation basis for equities, any rise in yields is liable to be so small and short-lived that valuations are unlikely to be affected for this reason.
For practical purposes, divided government will continue and, given the moderate nature of both candidates, there is little argument for a change in the equity risk premium. A risk would be if the “divided government” became “no government” and therefore unable to act in a crisis.
Again, while a Bush win might imply tighter monetary policy, the impact on liquidity conditions for the equity market is unlikely to be significant. The closer than expected results in Congress appear to have seriously challenged the Bush plan for some social security money to be invested by the private sector in equities.
Although there is little justification for adopting a different attitude to the equity mar ket as a whole, there are implications at the sector level. Bush would be positive for pharmaceuticals, oils and tob acco stocks. However, recent equity market performance would indicate this has alr eady been priced in to some extent.
In addition, several Senate results may temper Rep ub lican enthusiasm for supporting drug companies. Defence will receive a boost whoever becomes president.
Consensus analysis states that Bush is better for the dollar in the near term because of his looser fiscal and tighter monetary policy.
Also, Larry Sum mers' replacement at the Trea sury would probably be Law rence Lindsey, who is known to be a free marketeer and less likely to intervene on behalf of the euro.
But, fundamentally, the dollar has been supported by a strong international desire to buy US assets and, hence, finance the US current acc ount deficit. It is this which will continue to be critical.
The ability to finance the deficit will be little influenced by any difference in policies liable to be pursued by the next US administration.