As an economist, I’m often asked by fellow investors how to interpret news events and make sense of upcoming announcements: What does it mean if this happens, or what does it mean if that happens?
Tonight (Sept. 29) is the first presidential debate between Democratic Party nominee and former Vice President Joe Biden, and the incumbent, Republican President Donald Trump.
The debate will start at 9 p.m. Eastern time (6 p.m. Pacific Time) and last for 90 minutes, according to the nonpartisan Commission on Presidential Debates. There will be six topics, with each segment set to last 15 minutes. According to the commission's website:
- The Trump and Biden Records
- The Supreme Court
- The Economy
- Race and Violence in Our Cities
- The Integrity of the Election”
It takes 270 electoral votes to win the White House.
If Trump is seen to have done well enough to sway voters in “barely Democratic” states plus the two “exactly tied” states (Iowa and Texas) and any of the three Rust Belt states that voted for him in 2016 (Wisconsin, Michigan, Pennsylvania), then his chances of winning will be seen to go up.
Markets like continuity—equity markets generally go up the year after an incumbent president wins reelection and the U.S. stock market, before COVID-19, particularly liked the current administration’s rollback of regulations.
This time, markets likely will be assessing a higher probability of a new coronavirus relief package under a Biden presidency versus a likely much lighter tax and regulatory regime under Trump.
They might also have to start thinking about what a Biden-stacked Supreme Court might look like for business-related cases.
So the most important thing the markets will be assessing is the increased chances of winning for either of the major party candidates.
Within the details of the debate, any new revelations regarding policy will matter. On matters of geopolitics, there might be discussion about China, Iran, the UK, or Europe. These might all reflect a candidate’s industrial policy (favoring U.S. businesses over others) and trade policy as well. Any such revelations might have tremendous importance for any particular industry affected directly by that industrial or trade policy.
Agriculture investors might especially be listening regarding geopolitics and trade. With severe flooding taking place in China and with Iowa polls showing the candidates in a virtual tie, agriculture might take on special political significance this year. Investors will want to pay attention.
There may also be discussion of energy policy—cheap energy is good for manufacturing, while expensive energy will generally drive up the costs of manufacturing. Of course, the outlook for energy-related companies and the regions where their activity takes place might also be affected. Places where extracting carbon-based energy is especially important include Louisiana, North Dakota, Oklahoma, Pennsylvania and Texas, while the manufacturing base is especially important in Wisconsin, Michigan, Ohio, and Pennsylvania.
While those are the most consequential industries, many smaller industries also may be affected. Investors in companies that would benefit from increased trade with Mexico might perceive a benefit from a clear Biden win at the debates. Investors in private prison companies would likely cheer a strong performance by Trump.
There are only a finite number of likely outcomes: Biden does really well, Biden does slightly better, neither candidate dominates, Trump does slightly better, or Trump does really well. It’s good to think ahead of time how the markets are likely to respond to each of these scenarios. But like a good blackjack player who moves his bets up and down based on probabilities, investors are cautioned to keep in mind they are dealing only with probabilities and to keep invested for the long run.
The role of the economist is to help investors develop their own understanding of how probabilities might change based on possible outcomes of the expected event, in this case, the first presidential debate.