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How the U.S. election will affect the Brazilian stock market

. Oct 25, 2020
us election brazil stock market Image: André Chiavassa/TBR

“If he’s elected, the stock market will crash,” said U.S. President Donald Trump, of his challenger, former Vice President Joe Biden, during the final debate before the November 3 presidential election. However, stock futures in Asia and the U.S. barely budged on Friday after the face-off. 

That said, investors in Brazil might be advised to carefully consider all the possible outcomes for the U.S., as any turbulence in the world’s largest economy usually spills over to Brazil — especially when it comes to the stock market.

At this point, it is hard to know what exactly will happen to markets following Election Day. The campaign has been framed as a referendum of Mr. Trump — both he and Mr. Biden have not exactly laid down a wide array of specific proposals for the economy, being restricted to foggy platitudes. As a matter of fact, the Democratic challenger has been able to run his campaign on auto-pilot, relying more on Mr. Trump’s shortcomings. Enthusiasm among Biden voters remains below 50 percent.

There are, however, some clues.

</p> <p>Mr. Trump has <a href="https://www.vox.com/21504864/trump-stimulus-populists-conservatism-fiscal-moore-laffer">yielded to the Republican Party&#8217;s fiscal orthodoxy</a>, shutting down congressional negotiations earlier this month over future stimulus packages in the wake of the coronavirus crisis, despite the issue being wildly popular among American voters. Moreover, during Mr. Trump&#8217;s four years in office, the U.S. government rolled back many of the market regulations created during the <a href="https://podcasts.apple.com/br/podcast/the-trump-years-deregulator-in-chief/id1346207297?i=1000494207688">Obama years</a>.</p> <p>Some of these regulators that were scrapped by the Trump White House could return under a Biden administration. Furthermore, Wall Street is <a href="https://www.nytimes.com/2020/10/07/business/stock-markets-biden-trump.html">reportedly excited about the prospects of a &#8220;Democratic wave&#8221; and a Biden landslide</a> — which would narrow the chances of a contested election.</p> <h2>High U.S. debt affects Brazil</h2> <p>Whoever wins the race, however, will have a huge concern: a rapidly ballooning debt.</p> <p>At the beginning of 2020, the U.S. public debt stood at USD 20 trillion. Now, it’s over USD 27 trillion, but some scholars say it is actually much larger.</p> <p>By analyzing U.S. debt in recent decades, we see a constantly growing trend, which boosted current debt to World War II levels.&nbsp;</p> <div class="flourish-embed flourish-chart" data-src="visualisation/4150319"><script src="https://public.flourish.studio/resources/embed.js"></script></div> <p>Of course, the pandemic forced government spending upward. But increasing debt is an old problem, due in part to massive tax breaks to corporations — without any spending cuts to compensate.</p> <p>A September 2020 study by the Congressional Budget Office (CBO) shows that U.S. federal debt will reach USD 3.3 trillion this year — 200 percent above the 2019 deficit. For 2030, they expect it to reach 109 percent of the GDP, 2.5 times bigger than the average of the past 50 years.</p> <p>Therefore, the U.S. economy will suffer with the fast increase of its indebtedness, but it is unclear precisely when this will happen. When it does, this may impact the Brazilian economy, as the U.S. is <a href="https://brazilian.report/business/2020/10/15/brazil-trade-with-u-s-sees-worst-result-in-11-years/">Brazil’s second-largest trading partner</a>: a slowdown in Washington may lead to a reduction in the consumption of Brazilian goods and fewer foreign investments.</p> <p>This scenario would also have a profound impact on Brazilian capital markets. The debt spike could lead to inflation and a potential increase in U.S. interest rates, making the domestic fixed-income assets more attractive — as they are seen as the safest in the world — diminishing liquidity in emerging countries such as Brazil.

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Marco Harbich

Marco Harbich, CFP, holds a Master's degree in finance. He is CEO and CIO at NEO Finanças Pessoais, and a professor at Mackenzie Presbyterian University, in São Paulo

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