Financial markets have been mainly focused on the economic recovery, threats of a second wave of the coronavirus emerging, and the prospects of more fiscal and monetary stimulus. However, there's less attention to the evolving political situation which is showing increasing odds of a Democratic takeover of the federal government.

According to Predicit, former Vice President Joe Biden has a 58% chance of winning the election. A month ago, his odds were at 45%. Similarly, the odds of Democrats winning control of the Senate has also increased over the past month from 49% to 60%. The odds of Democrats retaining control of the House has slightly increased from 73% to 84%.

President Donald Trump's Falling Fortunes

President Donald Trump's approval ratings received a bump during the initial phases of the coronavirus. However, this has worn off. The most intense part of the pandemic is over, the curve has been flattened, but it has plateaued at a much higher level than other countries. His push to reopen the economy has hurt his approval rating among over 65 voters the most. This is also the age group that is most likely to vote.

During the 2016 election, Trump won this demo by 13 points. Currently, he's losing it by 1 point in head to head polling against Biden. This puts him in a tough position. Originally, his reelection campaign was going to be centered around the strong economy.

Due to the coronavirus pushing unemployment to record highs, a campaign built around the economy is no longer tenable. His next pivot was to campaign on an "American comeback" which means reopening the economy, however, this message is turning off many older voters.

His fortunes were further damaged by the protests and his divisive, uneven response. He's been unable to do the normal, Presidential routine of tamping down tensions and trying to find common ground which is challenging for any President, but Trump hasn't tried. This has turned off many, moderate, suburban voters as well who liked his economic policies.

Implications

It's quite possible and likely that President Trump's odds will improve especially given the polarized nature of the electorate. He's had previous moments when his polling dropped like the "Access Hollywood" tape and after the Charlottesville incident. Both times, his polling dropped due to conservative-leaning independents dropping their support, however, they've come back to him given the lack of alternatives.

For financial markets, there are some implications with a Democratic takeover of the federal government. Overall spending will likely increase. Defense spending will go down, and healthcare spending will go up. Additionally, there's a decent chance that corporate tax cuts will be repealed, and capital gains taxes will increase as well. Both of these developments could lead to selling pressure for stocks as the election nears.