Part 1 – Election Season In Full Swing
After the Conventions, Election Season in Full Swing
With both the Democratic and Republican conventions now behind us and Election Day just under seven weeks away, I thought it would be appropriate to share an analysis of the potential impacts to our economy whether Biden or Trump wins. Over the next 4 to 5 weeks we will review the coming election and some of the upsides as well as the risks to each candidate.
I don’t believe you need to be worried, however, I do feel it is important to be educated. This week we will look at what a November win for former Vice President Joe Biden will look like and the potential market impact of a second term for President Trump.
We focus strictly on the market impact of the election, with the economy also a secondary concern, since that feeds into market impact. Our evaluation of the market impact is not a voting recommendation. There is always more at stake in elections than simply markets.
These previews have been grounded in the facts, focusing on the upside and potential concerns of each candidate’s administration. If the upside doesn’t seem realistic, it can be dismissed, but we still think it’s useful to get a plausible version of the potential market upside (or lack of downside if that’s the best case) on the table.
Some of the major factors potentially supporting each candidate, in our view, include:
- The power of incumbency favors Trump. (Presidential incumbents win about 70% of the time.)
- Electoral College dynamics favor Trump.
- Enthusiasm toward one’s own candidate favors Trump, although the gap is narrowing.
- Polls currently favor Biden.
- The president’s approval rating favors Biden.
- The economy favors Biden, but circumstances are unusual.
- Enthusiasm to vote against the opposite party’s candidate favors Biden, but not surprisingly, that’s not necessarily a big driver of turnout.
A Biden Presidency: Upside and Risks
While a potential Biden presidency may mean a shift from some pro-growth policies of the Trump administration, it’s possible any negative market impact may be muted. Economic forces tend to dominate policy, though policy still matters, and historically, markets and the economy have shown little preference for either Republican or Democratic leadership. While there are risks associated with potentially higher taxes and increased regulation, and specific industries may experience a meaningful impact from policy shifts, for markets overall, there’s a real possibility that it may be just business as usual.
A Trump Second Term: Upside and Risks
A second term for President Donald Trump would likely feature a continuation of the pro-growth policies from the first term of his administration, and importantly for financial markets, a continuation of the status quo. Markets don’t like uncertainty, and while Trump’s negotiating style has been unpredictable at times, his commitment to lower taxes and deregulation may provide a consistent, market-friendly policy environment. We look more closely at what a second term for Trump could mean for the economy and markets.
Markets Signal the Election Remains a Coin Toss
Four of the past five elections have been decided by less than a 5% margin in the popular vote, so a landslide victory for either candidate appears unlikely. Although early polling data appears to show Biden as the front runner, we are also continuing to follow market signals, which currently suggest an incumbent victory.
How the S&P 500 Index performs in the three months leading up to the election has been a good predictor for who wins the White House, whether it reflects the state of the economy or because it signals the greater uncertainty that comes with a change in party. A positive market over this period may signal an increased likelihood that the incumbent party may win, while stock market losses during the same period have tended to predict an opposition party win. The stock market returns in the three months leading up to the election have correctly predicted the election result every time since 1984, and 87% of the time since 1928. Since the clock started ticking on this indicator August 3, the S&P 500 has been up almost 3% and at fresh record highs, clearly favoring Trump.
Our friends at Strategas Research Partners have also put together a basket of stocks likely to benefit from a Trump or Biden presidency. Since early June, the Biden portfolio has been outperforming the Trump portfolio, though we acknowledge these stocks are driven by other factors as well.
The Senate also is being closely watched this election. If Trump wins reelection, the Republicans may very likely hold their Senate majority, currently at 53–47. With Democratic Senator Doug Jones from Alabama unlikely to hold on to his seat based on the latest polling data, Democrats would have to defeat a net of four Republican incumbents in addition to a Jones loss to take control of the Senate if Biden wins. (If the Senate vote is tied, the vice president breaks the tie.) We would put the likelihood of the Democrats taking the Senate if Biden wins the presidency at well over 50%.
One historical economic signal that Trump would have to overcome in his bid for reelection would be the impact of this year’s COVID-19-lockdown recession and the fact that this occurred so close to Election Day. History has shown that when a recession has occurred during the two years before the election, the incumbent president has tended to lose. If there were no recession during that time, the incumbent tended to win.
In fact, the economy incredibly has predicted the winner of every presidential election going back to President Calvin Coolidge, when he won despite a recession within two years of the election. But Coolidge inherited a recession when President Warren Harding passed away, and by the time people voted in November 1924, the Roaring ‘20s had started to take hold and the economy was strong again. The unique circumstances around this year’s pandemic seem to add plausibility that this could be the first time in almost 100 years that this signal may be wrong—especially if the stock market and economy continue to recover between now and Election Day.
A Trump Win Makes a Divided Congress Appear Likely
If Trump wins reelection, the Republicans very likely may hold their Senate majority. Many key Senate races are currently little more than toss-ups, but in an environment where Trump would get enough electoral college votes for a victory, it seems unlikely that the Democrats would flip enough seats—they would need four—to take the Senate.
A Trump win, with Republicans holding the Senate and the Democrats keeping control of the House, would leave us with a divided Congress. A split Congress historically has been better for stocks, which tend to like checks and balances to make sure one party doesn’t have too much sway.
I hope this material has been useful as you prepare to vote in November. I am not a political expert, however, I’m very concerned about the election.
Next week we’ll review what to expect from each candidate on taxes.
