A lot can happen before November. How much control a party wins is critical. Macro inertia matters most to markets.
Our Top Market Takeaways for July 31, 2020.
What you need to know now about the U.S. elections
These days, if investors aren’t thinking about COVID-19, they’re probably pondering the potential implications of the upcoming U.S. elections. What tax consequences might different outcomes produce? What exactly are Republicans and Democrats proposing, and how might those policies impact various economic sectors? And what might it all mean for your investments and planning? As we move closer to November, we plan to tackle these and other elections-related questions.
This week, the S&P 500 was up (+1.0%) heading into Friday as investors digested a busy week of earnings and Republicans’ phase four COVID-19 relief proposal. The Republican proposal differs in both size and features from Democrats’ proposal, but we expect negotiations to yield an agreement in the coming weeks that will be sufficient to support current market levels.
Any number of factors (including political buzz) may influence short-term market moves in either direction. As investors, we can’t let potential volatility derail us. History has shown that staying invested for the long term (even through rocky times) means asset growth over time. The most important determinant of an investment approach continues to be your unique set of goals, risk tolerance and time horizon.
But as we’re only three months from November, we figured it’s a good time to offer three high-level thoughts on the election: how the polls are trending; how politics can influence the investments landscape; and why it’s really the macro inertia that matters most.
1. Getting from now to November.
By November 3, 2020, U.S. voters will have cast their ballots to elect a president, all 435 representatives in the House, and 35 of the 100 senators. It could take a bit longer than usual for winners to be declared officially, given an expected increase in mail-in voting due to the pandemic. Between now and then, Republicans and Democrats will hold their national conventions in August to confirm their respective presidential candidates (i.e., Republican Donald Trump and Democrat Joe Biden) and reinforce their policy platforms. For a general lay of the land, see our overview of the 2020 elections here.
We can look at polling data and market-implied odds to gauge probabilities of one candidate winning or to envision what the overall party composition of Washington, D.C. may be, although the data can change rapidly. For example, the odds of a Biden presidency and Democratic Congress have more than doubled in the past three months. But, also, history since 1912 tells us that incumbents (here, President Trump) win roughly three times out of four—except when there’s a recession within the two years prior to an election day (in the six instances when that’s been the case, only Calvin Coolidge managed to be re-elected).
2. How can elections influence the economic and investments landscape?
It really comes down to the candidates’ proposals and the likelihood their policies will be enacted. The president traditionally has had a relatively limited ability to pursue large policy changes without congressional consent (notable exceptions include foreign affairs and trade negotiations). Most federal laws start as a bill and weave their way through the legislative process. Shout out to Schoolhouse Rock for explaining it better than we ever could; click here if you need a refresher.
Elections can influence markets when candidates’ proposals:
- Clearly impact specific sectors or regions—A good example is the 2010 Patient Protection and Affordable Care Act, which halved the uninsured share of the U.S. population by 2016 and shook up the healthcare sector.
- Change expectations for growth and inflation—For example, the 1994 North American Free Trade Agreement (NAFTA) has quadrupled trade between its members since it was ratified, helping to boost economic growth and lower consumer prices.
As high degrees of partisanship seem to be driving legislation these days, high-impact proposals seem more likely to be adopted only if one party controls all: the House of Representatives, Senate and White House. For example, Republicans had both the White House and majorities in Congress when the 2017 Tax Cuts and Jobs Act was passed, which influenced U.S. equity prices by lowering corporate tax rates.1
Yet elections themselves have little bearing on the paths markets and the economy take. Assets tend to appreciate as an economy grows, and U.S. GDP has persistently increased over time—regardless of which party has been at the helm.
3. Macro inertia matters most to markets.
Think back to the 2008 election when Democrat Barack Obama ran against Republican John McCain for the U.S. presidency. They had opposing stances on issues such as the war in Iraq and healthcare, but their contest took place at the height of the Global Financial Crisis, and markets moved to reflect developments in that economic backdrop—not the tides of the election.
So what’s driving the markets now? We expect the battle against the COVID-19 crisis to dominate the investments landscape for the foreseeable future. The unemployment rate is still above 10%, corporate earnings are still depressed from lockdown-induced declines in demand, and uncertainty around the pandemic will persist until the health crisis is sufficiently mitigated.
We’re in an early-cycle economic environment, and policymakers from both sides seem incentivized to support the recovery. There are clear differences when it comes to policy preferences, but the legislative priorities of the Democrats and Republicans are likely to depend on the economic backdrop:
- Both parties appear to support additional stimulus, as evidenced by the bills making their way through Congress. Neither party is prioritizing narrowing budget deficits, and we think that’s justified, given the state of the economy (see here).
- While we see little chance of infrastructure spending in the phase four stimulus bill, an infrastructure package could get support from either party in 2021. The table below shows other areas of overlap, including reducing the cost of prescription drugs and staying tough on China.
- There are many areas where the presidential candidates differ, of course, including foreign policy and energy policy, as well as tax and regulatory policies (also in the table below). Again, the policy priorities in 2021 and thereafter are likely to depend on economic conditions. For instance, even though the Democratic leadership is likely to support tighter regulations and higher taxes, Democrats would be unlikely to advance these policies unless they coincided with other measures they viewed as stimulative to the economy.
Stay tuned for further insights on the election, which you’ll be able to find on the J.P. Morgan website.
1 It is worth noting that the filibuster rule in the Senate requires the votes of 60 senators to advance legislation, and neither party is likely to hold such a supermajority after the 2020 elections. That means the most partisan legislation is unlikely to pass. Some Democrats have advocated for getting rid of the filibuster if they win the Senate so they can pass policies that otherwise would be stymied (e.g., healthcare legislation, increase in the minimum wage). It is not clear if there would be enough support among Democratic senators to do this.
All market and economic data as of July 2020 and sourced from Bloomberg and FactSet unless otherwise stated.
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