I'm going to need more than popcorn!
With polls tightening and debates around the corner, it's getting very interesting.
[Editor’s note: Because Linda finally took a real vacation, this special look at the coming election replaces her normal weekly, which returns next week.]
Polls suggest we’re largely where we were four years ago at this point in the presidential race. Democratic challenger Biden’s lead has narrowed considerably, just as was the case for Hillary after that summer’s “conventional” party conventions. Incumbent President Trump is still the underdog, as he was then, and BCA Research thinks a sustainable comeback will require him to sign a new fiscal stimulus bill, the stock market to avoid a correction, crime to rise such that his “law and order” pitch resonates and new Covid-19 cases to continue to subside. Polling data correlations indicate combating Covid may be more important in determining the election outcome than economic data. But as long as the economy continues recovering between now and Nov. 3, BCA thinks Florida will flip, pushing Trump from a likely 230 Electoral College votes to 259. One other swing state—plus one of the stray electoral votes from either Nebraska or Maine—would keep Trump in the Oval Office. BCA’s model currently puts odds of a Trump victory at 45%, up from 42% last month.
Two months, of course, is a lifetime in this era of tweets, video posts and 24/7 instant analysis. Presidents with increasing unemployment in their election year are the only ones to lose re-election since World War II. There’s also the issue of “Trump fatigue.” His approval has remained largely stuck in the low 40s over four years as his politics of confrontation and grievance often diverted attention away from his many policy successes. Only Truman in 1948 was elected with a lower approval rating (40%) than Trump’s current 42%. Translated into voters, his rating suggests the president needs a 4 percentage-point improvement to get back to his popular vote share in 2016. Even then, Deutsche Bank says it’s not clear 46% will equate with an Electoral College victory. Only two second-term victories were achieved with less than 50% of the popular vote—Truman and Clinton (1996), and both were elections with credible third-party candidates, especially the latter (Perot at 8.4%). That won’t be the case this year. Further, Emory University political scientist Alan Abramowitz’s re-election model views Q2 GDP as a key predictive point, and the plunge in Q2 GDP this year was the worst ever. Combined with Trump’s comparatively low net approval, the model estimates the president will get slaughtered in the election, though it notes voters may not blame Trump for the virus-led economic downturn.
Biden has his own issues. While his choice of Sen. Kamala Harris (D-Calif.) was viewed as safe, it was hardly inspiring. It’s possible she could help solidify the Black vote, and she’s viewed more as a centrist than progressive, which could help with older voters. But Trend Macro, citing her tough questioning of then-Supreme Court nominee Kavanaugh, thinks Harris will prove to be a divisive figure who will drive Republican turnout. Moreover, she was the only Democratic presidential candidate who proved to be a poor campaigner, going from near the top to the first to drop out. If Biden chooses to continue his present strategy of making relatively few public appearances, her weaknesses will be on constant display if she takes an unusually prominent role in the campaign. I personally haven’t seen much of her yet. In addition to market-unfriendly tax increases (more below), Biden, if he wins, is almost certain to populate his cabinet with a number of, if I may, non-moderates. Washington Analysis expects to see members of the progressive wing to be placed in charge of the Environmental Protection Agency, Health and Human Services, the Consumer Financial Protection Bureau and the Energy Department.
Close elections historically have seen equities begin to go sideways in late summer/early fall, then rally strongly after a clear win, independent of who won. Cornerstone Macro cautions against drawing broad conclusions on market reaction to an outcome. Given few observations from a statistical perspective, such prognostications could mislead. It thinks investors would be best served considering how various election scenarios may result in policies that particularly affect specific sectors/securities.
Does it even matter who wins? Policy changes arising from a Democrat sweep—higher corporate and capital gains taxes and increased regulations—arguably would not be equity market friendly. Biden has pitched a 43.4% capital gains tax rate, the highest since 1978, and a corporate net income tax hike to 28%, taking back half of the Trump cut. But history suggests these tax increases may not be all that negative for markets, Deutsche says. Neither would alter long-run trends in earnings or total returns—capital gains tax rate changes historically shift the source of returns between capital gains and dividends, but don’t change the trend of total returns. Others suggest any tax increases aren’t likely to occur anytime soon anyway with an economy likely to recover in fits and starts. Both sides are expected to push stimulus—Democrats on the demand side via more spending, and Republicans on the supply side via more tax cuts. And the Fed will remain uber-dovish regardless of the election outcome. Nothing trumps that (if I may use the word in a different context)!
The next few months could get “dark.” The likelihood of a contested outcome is real. Deutsch expects the losing side may try to extract as much leverage as possible before conceding, which implies the prospect of a protracted period of legal battles and more uncertainty beyond the election date (more below). Such developments would not be totally neutral for U.S. credibility and could cause nontrivial repricing in bonds, with a possibility of a substantial whipsaw. In the worst case, this could be erosive for currency and risk, and would suggest a higher risk premium on all U.S. assets. It wouldn’t be surprising if the election turns out to be even more polarized than in 2016, when every single state that elected a Republican senator voted for Trump and every single state that elected a Democratic senator voted for Hillary. This was the first time in American history, at least back to 1913, when the Constitution began mandating the direct popular election of senators, that there was no "ticket-splitting," in which voters select a representative or senator from one party while supporting the opposing party’s presidential nominee.
The biggest worry may well be the election itself. According to a Bipartisan Policy Center review of federal data on voting by mail and absentee voting, 34 states had fewer than 15% of their ballots cast by mail during the 2018 federal election. States just don’t have enough time. Renaissance Macro expects both sides to prepare legal challenges over the risks of mail-in ballots vs. traditional ballots. CBS reports that federal studies found mail-in ballots can be lost, uncounted or rejected because voters are unfamiliar with verification requirements. The rejection rate can run as high as 5% to 10% in certain states, a potential difference maker in a close election. There also could also be a shortage of polling workers. According to an MIT study, two-thirds of election workers in 2016 were over 60, the cohort most at risk to Covid. Finally, there’s a question of whether postal-sorting facilities closed due to the virus will make it harder to get ballots out to people and back in time to be counted—never mind vote-counters being overwhelmed in states where there is a little history of mail-in voting. Pollster Frank Luntz cautions that most Republicans will likely vote in person, while most Democrats may vote by mail. (Democratic leadership is pushing for this.) In the event of a close election, the final outcome may not be known until the end of November or potentially later, depending on if there are any contested recounts such as what happened with Florida in the 2000 election that ended up in the Supreme Court. (From Election Day until Dec. 20, the S&P 500 fell 13%.) If it lands there again, conservatives hold a 5-4 advantage—again. Do you suppose wine pairs well with popcorn?