The Election of 2020
My favorite song from “Hamilton” is “Election of 1800,” in part for the irony. The song opens with something of a counterintuitive plea, at least by modern standards: “Can we get back to politics? Please?” Normally, such a request is the last thing I’d want. But in the COVID era, run-of-the-mill politics in an election year sounds pretty good.
Writing about the market implications of presidential election scenarios typically involves analyzing which sectors are best positioned to benefit from Democrat or Republican campaign platforms. But this isn’t your typical election cycle with COVID-19 uncontained in the U.S. and concerns about the type of recovery we can expect across the global economy. The current investment landscape is by far the most unusual period in my 25-year career on Wall Street. Believe it or not, though, the two parties have one big thing in common that helps frame the market implications of Election 2020: their willingness to embrace deficit spending.
New Attitudes: Party Wallets Open
Both parties are keen to spend the U.S. out of the crisis and let the future deal with the implications. Previously, I discussed new attitudes about government spending in the context of Modern Monetary Theory, and did so again when COVID flared and required the government to Throw Money at this Problem. Today, it can be summarized like this: fiscal stimulus seems to be accepted practice, no matter the consequences. (But there are always consequences.)
Fiscal stimulus under the Trump administration was a steady trend well before COVID necessitated the extraordinary economy-wide relief programs. Policies like the sweeping tax change of 2018 are hallmarks of this administration. Republicans want more of the same over the next four years. But no matter who controls the White House in 2021, taxes will need to rise as the nation grapples with the aftermath of COVID-spending.
No surprise, the presumptive Democratic nominee, Joe Biden, essentially proposes the exact opposite of the Republican platform. Among the highlights, Biden wants to increase corporate taxes and taxes on high-income individuals while tightening financial regulations. Elsewhere, the Democrats remain committed to their historical ethos of federally-funded programs that pump up the demand side of the economy. For Biden, technology and the environment are of particular focus.
Sector Implications: More of the Same or a Progressive Shift
Nothing is guaranteed, of course. What is said during a campaign and the reality of what is implemented once in office, are two completely different things – its politics after all. This discrepancy is likely to be even greater due to the uncertainty and costs associated with COVID-19. The following are possible scenarios and the potential impact on different sectors of the U.S. economy.
Deep Blue Shade: A Biden presidency and Democratic House and Senate
A Biden presidency in a Democratic sweep would pave the way towards a more progressive agenda fueled by expansionary fiscal policy. In this scenario, healthcare reform and a new drug pricing bill are on the table, as is an infrastructure bill. Tax changes would likely include repealing state and local tax (SALT) deduction and higher rates for high-income individuals. Also, expect tighter environmental and financial regulations, as well as renewed multilateral outreach and new approaches to the trade conflicts.
As illustrated in the table above, this scenario is potentially positive for a wide range of industries. Within this scenario, we are likely to see infrastructure projects to help support GDP. This has the potential to be favorable for the transportation industry. Conversely, healthcare reform could bring drug-pricing back into the spotlight.
Lighter Blue Hue: A Biden presidency, Democratic House and Republican Senate
Biden in the White House and Democrats controlling the House but not the Senate means Washington is likely to experience gridlock. In a lighter blue government, transformative fiscal support is unlikely. More likely would be a continued push to rebuild international relationships, regulations that promote technological innovation, environmental protections and moves to keep Wall Street in check. A bevy of executive orders are possible in this scenario, but those are limited in scope and often get caught up in the courts, which now tilt conservative.
As things currently stand, this is the most likely scenario. There is currently more than a 50% probability that we end up in this form of gridlock.1 While there are still areas of the market that are likely to benefit, without the fiscal support, this scenario is likely to be less supportive for markets.
Same Red Hue: A Trump presidency, Republican Senate and Democratic House
In a repeat of the current executive and legislative breakdown, expansionary fiscal policy is possible, but it would likely mirror what we see now: reactive in nature, driven by the continued economic fallout from COVID. Regulatory action from the Executive Branch would likely continue to focus on areas like immigration and protectionist policies.
Deep Red Shade: A Trump presidency and Republican House and Senate
Currently the least likely scenario, Republicans in full control would mean more of the same fiscal policy tactics, only expedited. Another round of corporate-friendly tax cuts and easing of environmental and financial regulations could be in the cards. And U.S. protectionism would likely increase further, with continued moves away from global partners.
The Great Unknown: Where COVID Goes from Here
The biggest question for the short and long terms is how quickly, if at all, an effective vaccine can be developed, tested, and distributed safely. Until then, a more coordinated federal response to containing the disease would help clarify the economic picture in the U.S. But at this point, even with the virus surging, particularly in the South and West, a federal approach to contain the virus’ spread seems elusive.
By comparison, Europe put health first and sacrificed its first-half performance with stricter shutdowns and slower reopenings. Now that its economies are largely back up and running, European economic data is generally trending higher. Despite the U.S. injecting much more fiscal stimulus into the economy—to the tune of roughly 7.9% of GDP more – Europe looks like it may emerge from this crisis quicker.2
With lawmakers negotiating another hefty stimulus package, it looks like the government still wants to buy the economy a recovery. But talk of health policy trumping fiscal policy during a pandemic is likely to increase as the election nears. The Biden campaign advocates a federal response more in line with Europe’s.
Promises, Promises: Election Year Grains of Salt
Typically, a lot of (ie, much of) what candidates say during a campaign never happens, even in sweep scenarios. In some ways that makes handicapping the sector responses to election results a fool’s errand. But in other ways, that knowledge forces you to ignore the noise and simplify the equation. The next line in the “Election of 1800” is profound in its simplicity: “Every action has an equal opposite reaction.”
The shape of the economic recovery and the investment landscape will be determined by 1) the timing of a vaccine relative to the continued spread of the disease and 2) what the U.S. does, or does not, do to manage its way out of the crisis. Quite simply, a lack of action will extend the sickness plaguing the economy. On the positive side, just as certain sectors and themes mobilized to help economies operate in these unusual times, adjustments to current strategies to contain the disease could dramatically affect the trajectory of the recovery and the future.