The trajectory of the election after the gunshots

The gunshots in Pennsylvania may become the iconic event dominating the election after the first round of debates. Today, after the assassination attempt on Trump, the odds of the Republican Party winning both the presidential and congressional elections have significantly increased. According to news reports, new developments are still ongoing:

Trump himself is unharmed: The attack did not cause serious harm and he has been discharged from the hospital;

More "concern" and "support": After the assassination attempt on Trump, Biden spoke with Trump, high-ranking members of both the Democratic and Republican parties, as well as former President Obama, all publicly expressed their concern for Trump;

Democrats are on the defensive: Biden's campaign team announced the suspension of all of Biden's upcoming public events and will promptly remove all TV campaign ads.

Drawing lessons from history, the "assisting" role of assassination in American elections may indeed be more pronounced. Looking back at the 9 presidential assassinations in history, in 6 cases, the party of the assassin ended up with the presidency. Regardless of whether the assassin died, as long as there are no obvious flaws in the campaign policies, winning is often a high probability event, as seen in the following two well-known examples in the market:

The first example is when the assassin died, in the 1964 U.S. election, Johnson won by a large margin. In 1963, after the assassination of then U.S. President John F. Kennedy, Lyndon B. Johnson succeeded as President and successfully associated himself with Kennedy's reputation. In the 1964 U.S. election, Johnson easily won the presidency, winning in 44 out of 50 states and the District of Columbia.

The second example is Ronald Reagan, who was assassinated but did not die. On March 30, 1981, U.S. President Ronald Reagan, who had been in office for only 69 days, was shot with a handgun while leaving a lunch event with union representatives at the Hilton Hotel in Washington, D.C. However, he quickly recovered due to timely medical treatment.

In the 1984 election, President Reagan ran for re-election, and despite being questioned about his age (73 years old at the time), he performed poorly in the first debate but excelled in the second debate, ultimately defeating his Democratic opponent Walter F. Mondale with an overwhelming advantage of 525:13.

Currently, Biden is facing increasing campaign pressure as he is "besieged from within and without" after the first round of televised debates.

After the first round of televised debates, Biden's support within the Democratic Party has already wavered. As shown in Figures 4 and 5, there are a total of 260 Democratic Party members in both houses of Congress. From June 30 to July 12, 19 members publicly stated that Biden should step down, 12 expressed concerns about this issue, 60 publicly supported Biden to continue running, and 169 members have not clearly stated their positionAs shown in Figure 6-Figure 7, Vice President Harris's approval rating has significantly increased since July, making her the first choice to replace Biden, followed by California Governor Gavin Newsom.

After the assassination of Trump, Biden's "old and weak" disadvantage has been magnified once again. A major factor currently constraining Biden's re-election is his worrisome health issues, while Trump has shown resilience after the assassination, widening the gap in public perception between the two. Considering the American culture's admiration for personal heroism, Biden's support among swing voters may decline again after this assassination incident involving Trump.

Another suspense lies in the control of both houses of Congress, with the balance possibly tilting further towards the Republican Party after the gunshots in Pennsylvania. The Democratic Party is currently at a disadvantage. In November, not only will a new president be elected, but there will also be midterm elections for both houses of Congress, directly determining the new president's fiscal space and the ease of policy implementation. Of note, the debt ceiling is currently suspended and will resume on January 2, 2025, facing new debt ceiling negotiation issues in the first half of next year, making the control of both houses crucial.

The Senate has a total of 100 seats, with the Democratic Party currently holding a slight majority (Democrats: Republicans = 51:49, including 4 independent individuals who lean towards the Democratic Party). This year, 33 seats are up for election, and for the Democrats to retain control of the Senate, they must win 23 out of the 33 seats (Figure 8). The House of Representatives has a total of 435 seats, with the Republicans currently holding a slight majority (Democrats: Republicans = 213:219, with 3 vacancies), all seats are up for election this year. The Hill model predicts that the Republicans have a 60% chance of retaining the House and a 78% chance of regaining the Senate this year, indicating an overall disadvantage for the Democratic Party. If the Democratic Party "stirs up trouble" by replacing Biden, it may divert attention or disrupt morale, adding risks to the congressional elections.

"Trump Trade" poised to strengthen once again

It is expected that the current market will further strengthen the "Trump Trade". Looking back at the period after the third presidential debate on October 19, 2016, Trump's poll support began to lead until the end of that year. The main features of trading during this period were: high interest rates, a strong US dollar, and a strong US stock market. Behind this were loose fiscal policies and tight trade policies, leading to rising US inflation expectations and widening economic gaps between the US and non-US economies.

According to the review, it is worth noting that a significant victory can easily lead to differentiation in asset performance before and after the election.

Based on historical election experiences, we categorize election results into four scenarios: Democratic Party narrow victory, Democratic Party significant victory, Republican Party narrow victory, and Republican Party significant victory, comparing the performance of various assets in the 6 months before and after the election:

(1) Republican Party Narrow Victory: U.S. stocks, U.S. bonds, crude oil, and copper performed better before the election, while gold performed better after the election, with the largest difference seen in crude oil performance before and after the election.

(2) Republican Party Significant Victory: U.S. stocks, U.S. bonds, gold, and copper performed better before the election, while crude oil performed better after the election, with the largest difference seen in crude oil performance before and after the election.

(3) Democratic Party Narrow Victory: U.S. bonds, gold, and copper performed better before the election, with U.S. stocks and gold performing better after the election. Overall, the performance of various assets showed minimal difference before and after the election.

(4) Democratic Party Significant Victory: U.S. bonds and crude oil performed better before the election, while U.S. stocks and gold performed better after the election. Among them, copper, U.S. stocks, and gold showed the largest difference in performance before and after the election.

Overall, regardless of whether it is a narrow victory for the Republican Party or the Democratic Party, various assets have performed relatively well, with minimal difference in performance before and after the election. However, in the case of a significant victory by one party, there will be differentiation in asset performance before and after the election. If the market anticipates a victory for Trump and the Republican Party, the final result will be the same, and attention should be paid to the differentiation in asset performance before and after the election.

Furthermore, comparing the experience of the current U.S. economy with similar historical states will reveal that if the U.S. economy enters a recession defined by the NBER within 1 year after the election, U.S. stocks and U.S. bonds perform well in the 6 months before the election, but poorly in the 6 months after the election, while commodities perform better in the 6 months after the election, with gold performing the best.

Risk Warning: Unexpected developments in the U.S. election process, as well as geopolitical frictions