Tonight sees the first presidential debate - what investors need to know

In a run-up to a presidential campaign like no other, tonight sees the first of three debates between Trump and Biden - and given the lead-up has been so heavily disrupted given Covid-19, tonight's debates are of particular importance for both voters and investors to get to grips with the priorities and views of both candidates.

Although 90% of voters are expected to have already made up their minds, the remaining 10% could hold the key to what shape Congress and the White House take come November, and tonight is expected to be the most widely watched debate.

The polls currently see Biden with the edge over Trump and point to the debates as being Biden's to lose - whether Democrats can widen the gap during these debates or that gap starts to narrow, there are significant implications across investment portfolios.

The widely-held view from analysts is that a Biden victory is negative for the stock market. This is due to his comments on hiking taxes, in which he stated he would increase the income tax rate from 26% to 40% for the highest earners, whilst increasing corporation tax from 21% to 28%. These policies would reduce both company and individual earnings, and thus bring down with it analyst estimates.

However, a Democratic victory does not necessarily mean these tax hikes will be forthcoming as Democrats would require a sweep of both the White House and Congress to get policies through effectively. There are also sectors in the market that would benefit from a Democratic victory - namely renewables and infrastructure given Biden's stance on investing in clean energy and desire to pass through a significant infrastructure bill. Investors may also do well to increase exposure to Chinese equities should the Democrats win given their less aggressive stance towards China - something that would also help technology names with high foreign revenues. Meanwhile, for a Republican victory, energy and financials would likely rally from the prospect of reduced regulation.

Dan Clifton, Head of Policy Research at Strategas, said that historically the incumbent performs poorly in the first debate, in the same way that Obama did against Mitt Romney in 2012. However, although a step closer to a Democratic victory may be seen as a negative for equities, a strong performance from Trump could in fact cause more volatility and risk-off sentiment from traders.

The reason for this is that the one thing markets want more than anything is to minimise uncertainty and the stronger Trump performs in these debates, the closer the election result becomes. The uncertainty has been further exacerbated by Trump's recent comments about rejecting an election defeat adding to likely risk-off sentiment and volatility post the election. This can also be seen in options markets where the CBOE volatility index shows that instead of significant volatility just being expected in October, it is now expected to be heightened through to the end of the year. As a result, going into election day the market would prefer to see a clear winner - even if it is Biden.

It is not just the equity markets that will be closely watched during the debates, with volatility also expected to be high in the bond markets. Michael Schumacher, Director of Rates Strategy at Wells Fargo sees the 10-year treasury rallying to 0.6% in the scenario of a Biden victory and a sell-off if Trump manages to gain ground.

Not only do the elections impact the market but so too does the market affect the election. Investors should consider how the market also performs between now and election day as statistics shows that, going back to 1928, the party controlling the white house has won nearly 90% of the time when the S&P was positive in the three months leading up to the election. Republicans will be hoping that August's rally comes back soon.

Although the debates will undoubtedly bring volatility to the markets, it will likely be particularly heightened at the sector level as traders adjust to be best placed for the outcome in November, with the overall market volatile, although rangebound. There is also little evidence that election results drive the overall direction of the market over the long run. As JP Morgan Private Bank notes, the election is "unlikely to materially drive share prices" and they see the S&P gaining a further 10% in the next 12 months from yesterday's close.

In all the uncertainty of 2020 - one thing does seem certain - Presidential candidates and investment portfolios will continue to be tested.