Election Impact on Markets

By Mitchell Anthony

July 31, 2020


With the election on the horizon and the economy in recession it is certainly reasonable to think that a change of the Washington regime is possible, hence the impact on the economy and the financial markets must be evaluated. Historically changes in Washington regimes have occurred during periods of recession, or after substantial loss of confidence in the regime’s ability to get the US economy back on a path of growth. Further changes in the Washington regime have occasionally occurred because the majority believes that the current president is out of touch with the majority’s needs and desires.  Sadly, America is sharply divided today and probably more than ever in its history.  There is civil unrest to some degree across America in a small minority,  and the economy is in recession as a result of Covid 19 virus.  Is this recession and civil unrest enough to cause the majority to vote for change, and if so what will this mean to the US economy, financial markets, and MACM portfolios?

Generally it has been true that the regime in charge in Washington has little impact on the economy with their policy initiatives and actions and orders, as it takes years to bring about change particularly when Congress is divided.  However presidents historically have had tremendous impact on the economy by inspiring confidence and optimism in the minds and hearts of Americans, or conversely had negative impact by becoming a source of pessimism and fear.  Most of Trump’s success can be attributed to the rising tide of consumer confidence and optimism that America has enjoyed since his election.  His make America great again theme has been strongly embraced by a strong majority of baby boomers and Generation X voters.  However the millennial’s have been less confident under Trump and have demanded new socialistic policies to address their belief that there is far to much inequality in America.

While Trump is trailing in the polls there is good reason to believe that the majority needed to reelect Trump remains on the side of Trump because of the majority’s unwillingness to be visible about their support for Trump and his make America great again policies.  Conversely Trump’s handling of the virus and his desire to seek long-term gains for America’s position in the world at the expense of short-term pain for trade, have caused some of his supporters to consider the Biden alternative.

The Outlook is Bright no matter who wins!

It’s hard to envision a doomsday scenario for financial assets that comes as a result of either candidate’s election.  Trump, Biden, Congress, and the Central bank are all aligned in that this economy must survive Covid 19 and are committed to do whatever is reasonable to make that happen.  It seems like the doomsday for Stocks, Bonds and Real Estate occurs ONLY as a result of the inability of the globe to manage and/or terminate this virus within the next 2-3 years.  The fed has lots of room to print money and supply cheap debt to the treasury while the vaccines are perfected and herd immunity is achieved.

Let’s first evaluate what a Trump victory would mean to the economy and the financial markets.

A Trump victory would most likely ensure that the economic bailout of the current recession will continue and Congress along with the current regime would monetize the economic problems until they are no longer obstacles in the path of the US economy. The current consumption themes in our economy would likely continue along with some new themes based upon the Covid 19 impact.  Digitization of data and cloud computing would continue to lead consumption in America.  Not far behind would be the demand for: digital devices, electric vehicles, preventative healthcare, goods and services that make “at home life” manageable, along with an improving picture for homeownership.

Trump would likely continue with the policy initiatives that he has already begun which include: fairness in trade with China, fairness in trade with Europe, substantially less regulation in business, lower taxes, nationalism, support for capitalistic ideas, higher wages for individuals,  stronger growth for businesses and corporate America, Made in America, and increased opposition to socialistic trends and entitlement programs.

Prior to Covid 19, the US economy had just begun to break out of a long period of minimal growth. The return to this above trend type of growth still seems dependent upon America and the globe defeating the virus in a short amount of time.  It’s likely the economy will grow slowly throughout the second term of Trump and with it will be near zero interest rates and inflation, and substantially higher values for assets as result of the new liquidity that will be added to the system from the central bank and congress’s desire to take on new debt.  It is reasonable to believe that the Dow Jones industrial average will double by the end of Trump’s second term.  It is also reasonable believe that real estate prices will have seen their bottom and will have substantial advances from here as well.  Gold will do extremely well as the expansion of the Fed’s balance sheet will weaken the dollar and drive investors into gold as a currency alternative.  Overall assets will remain highly valued.  The leadership in the equity market in the near term will remain with the Tech Titans but eventually be joined by cyclical names as the recovery becomes entrenched.

What does a Biden victory mean to the economy and the financial markets?

A Biden victory would seem to force investors to embrace much different policy initiatives and their impact on the US economy. The consumption themes in the US economy today would likely continue in the intermediate term with a Biden victory but would likely change course as his new policy initiatives are put in place. For Biden to be elected it would seem that the majority’s confidence will have to sink much further than current levels.  The majority will also have to believe that they will be much more confident and optimistic in a world led by Mr. Biden and the Democrats.

Can Mr. Biden’s policy initiatives strike a tone with the majority? Mr. Biden has been somewhat quiet about his plans for America under his leadership.  He has talked about plans to forgive college debt and basically make a high-quality college education almost free in America for those with family income of 125k or less.  He wants to provide more subsidy for healthcare so anyone who wants healthcare can get it with the help of the government. Mr. Biden wants to raise the minimum wage from $7.25 to $15. Taxpayers both at the consumer level and corporate level will pay for the socialistic programs that he plans to introduce to America.  Mr. Biden wants to quickly end the trade war with China without any real gains having been made with the out of balance, and unfair trade, posture that we have currently. He wants more support for Unions and price fixing.  Mr. Biden wants to return to the theme of having America support the globe and push America further down the path of becoming a socialistic nation that shares its wealth and promotes financial equality.  Biden will oppose help for carbon based fuels and offer more incentives for electrics and hybrids.

Under Biden the intermediate path for the economy will likely be no different than under Trump in that Congress and the central bank will keep the oxygen mask on the American Economy until it is revived fully.  As a result the financial markets will remain highly valued but we will undoubtedly have new leadership amongst asset classes and new leadership within asset classes.  It is likely that interest rates will turn negative as investors fear a much longer period of recovery for the US economy under Biden and the heavy cost of his socialistic programs.  Stocks will likely remain highly valued along with real estate, however the growth going forward will be muted as liquidity will move a bit more toward negative yielding treasuries.  Gold will do quite well in this environment.   The tech Titans will likely encounter headwinds and healthcare and clean energy tailwinds

How are we positioning the portfolio given the unknowns about the election and the virus?

We believe the Trump victory is more likely than a Biden victory but at the same time we believe both stocks, bonds, and gold will do well under both administrations. Trump has mismanaged the virus a bit, and further his desire to fight so hard has hurt his image with undecided voters.  Has Trump managed the virus good enough for voters to give him a pass on this blunder and will the virus be under control by election time?  This seems reasonable but we must watch for signposts of trouble with either one of these drivers of the election outcome.

We are invested currently believing a Trump victory is likely, but at the same time we are positioned to move quickly toward new positions in treasuries and lower allocations to stocks, if and when the environment turns more toward Biden and against Trump.  We are already building a position in gold and plan to continue to increase it over the next three months at the expense of stocks.  We will begin to build a position in fixed income as well if Biden’s position in the polls continues to improve.

We are heavily invested in stocks that have secular growth themes.  We have modest exposure to cyclicals, financials, and industrial names as the intermediate outlook for the economy is still dark.

There will be great returns in the year ahead. We remain cautiously optimistic.