US Election countdown: A dreaded fourth scenario

Polling numbers are according to fivethirtyeight.com, a polling aggregator.

The oddsmakers this week say:

Betting odds numbers are according to polymarket.com, a real-money betting site for event outcomes.

This week: as Trump edges lower in polls, a fourth election scenario and what it could mean 

This week has felt quieter if more absurd than recent hectic weeks in the US election season. Cat-eating memes related to Trump’s unsubstantiated claims that Haitian immigrants are stealing and eating cats in an Ohio town took up the most bandwidth in social media. The two candidates are promising almost everything to everyone: Harris vowed to support investment in crypto and AI, while Trump was out promising additional tax cuts and even mentioning the idea of limiting the top interest rate on credit cards to 10%. Americans pay a stunning 25% on average for credit card balances! 

A dreaded fourth scenario? 

This week, we look at a fourth scenario for the US election that could prove the most broadly negative for the global economy and for the stock market in the wake of the election. And we look at European companies that could do well under any scenario in which Trump becomes president. 

Chart of the week: one sector that may thrive in the event of a Trump presidency

As we discuss below, German infrastructure investments are needed and a Trump presidency could accelerate them. Above, a five-year cumulative return chart of three German companies with significant infrastructure exposure: Siemens, Hochtief and Heidelberg Materials. 

We know that a Trump presidency would bring tariffs, and not just for China. That will hit the current “sick man” of Europe: Germany. Its economic model of excessive reliance on exports is already failing even before the risk of Trump II, in part on the disruptions to export markets and energy prices from the war in Ukraine, but also as China is gobbling up the global car export market, especially in electric vehicles. Germany must get its head out of the sand and re-invent itself. That will require massive investment on the domestic front, especially in its aged infrastructure. From digitalization of government at all levels to the basics like the power grid and roads and bridges, Germany is falling behind. Federal elections must be held there by September of next year, and the current very unpopular sitting coalition will need to come up with a new investment plan to get the economy moving forward or it will face a wipeout. It will likely do so with or without Trump, but investments might be accelerated and larger should he win as his tariffs will deepen Germany’s plight.

Ten large publicly-listed companies associated with German infrastructure:

Siemens – an industrial titan involved in everything from electrification, automation and digitalisation 
Hochtief – a massive construction and construction services company 
Thyssenkrupp – a down-on-its-luck steel and industrial components maker
Deutsche Post – a logistics company, not just mail, but freight, supply chain management and more.
SAP – the enterprise resource planning software giant.
E.ON SE – runs energy/electrical infrastructure
Deutsche Telekom – the telecommunications giant, though much of their revenue comes from the US.
BASF – maker of chemicals, plastics and other specialty products
Heidelberg Materials – a maker of cement and other materials for construction
Bilfinger SE – an industrial services and construction company.

The fourth scenario for the US election and what it could mean.

Because the founders of the US government created a “checks and balances” system to avoid any branch of the government having excess power, US elections have very high stakes. It is not just about who becomes president. To have real impact outside of foreign policy, the president’s party must also have control of both houses of Congress – the House of Representatives and the Senate. In our early assessments of the likely US election outcome, we saw two outcomes that were the most likely as long as the polls remain relatively close going into Election Day on November 5th: a Trump win and “sweep” scenario in which the Republicans winning both houses of Congress, or a Harris “gridlock” scenario in which Harris wins, but the Democrats don’t have control of the Senate. 
The third scenario we have discussed was a Harris sweep, which looks very low probability even if Harris wins convincingly in the popular vote because the Senate election map strongly favours Republicans taking back control. 

The dreaded fourth scenario: Trump gridlock
That brings us to a fourth scenario we haven’t really entertained, but perhaps should, as it is quite possible. That is a Trump gridlock scenario in which Trump is elected president and the Republicans take the Senate, but fail to take the House. This scenario is possible if Trump wins the presidency, but loses the popular vote by 3% or more, for example. In 2016, Trump won the presidency while losing the popular vote to Clinton by 2.1%. In 2020, he lost the popular vote by 4.5%, but only lost the presidency by losing a total of less than 43,000 votes combined in the states of Arizona, Georgia and Wisconsin. Those votes were a tiny 27 one-thousandths of the total popular vote nationwide. 

Why is the fourth scenario a “dreaded” one? It would likely prove one of the most negative plausible scenarios for the US economic outlook and for global markets. The Democratic House and Trump would likely be in constant war as the House blocks any attempt at new tax cuts and possibly even the continuation of some of his old tax cuts while Trump blocks continuation of the “green” parts of Biden’s huge fiscal packages and stops all new spending initiatives that don’t come with new tax cuts. This would be especially dangerous in a slowdown and aggravate any recession risk. At the same time, we all know that Trump will bring new tariffs, which are inflationary, possibly hampering the ability of the Fed to cut rates to support the economy. 

What are the odds?
Polymarket.com, the event betting site currently puts the odds for our Trump gridlock scenario at 15%. That compares with 28% for the Trump sweep scenario, and 30% for the Harris gridlock scenario and 21% for the Harris sweep scenario. 

One thing is for sure, the polls are not shifting much and the outcome is as uncertain as ever.

See you next week!

About the author: John is Saxo’s Chief Macro Strategist, with over twenty-five years’ experience in the financial markets, chiefly as Saxo’s former Head of FX Strategy. He is also an American, having grown up in Houston, TX and has a long-standing passion for following the course of US elections and their place in history since being allowed to stay up late as a young kid to watch the 1980 election results roll in and Ronald Reagan winning the presidency over Jimmy Carter.