Many of us were eagerly anticipating a thorough presidential debate to compare and contrast policy positions of President Donald Trump and former Vice President Joe Biden. In what looks to be one of the most consequential elections in modern U.S. history, a vetting of the key issues is something we all needed to hear.
Instead, it looked like an embarrassing schoolyard brawl where only the fisticuffs and hair-pulling were missing—thankfully, social distancing was required! While much post-debate discussion centered on the inevitable question of who won, I submit the clear loser was the American people. I shudder to think that America’s children watched this debacle. I, in fact, was so frustrated I found myself flipping TV channels back to the New York Yankees baseball game. At least there I could turn the sound off and still catch the action.
While, to some, this may seem like good political theater, we think it is incredibly frustrating for investors worldwide. The debate confirmed the levels to which politics has sunk in the world’s largest economy, and it barely touched on economic, tax and regulatory policy at a time when the two parties stand further apart on these issues than they have for decades.
I guess we are going to have to make sense of this on our own.
Fiscal, Tax and Regulatory Policy
In anticipation of the political season, back in August we wrote that the “circus was coming to town,” and that it would likely bring market volatility with it. The election was one reason we warned of a potentially stormy fall for markets a month ago.
We got some of the volatility in September, with the S&P 500 shedding almost 10%. Futures on the CBOE VIX Index currently show a further spike in volatility expectations for the period immediately after Election Day on November 3. Tuesday’s circus-like debate, sowing confusion and uncertainty, indicates why. Thursday’s confirmation that the president has contracted the coronavirus adds yet more uncertainty, and as I write it remains unclear what the implications of this will be for protocols in Washington.
Political predictions are always fraught with risk, of course, but overall, a Democratic blue sweep of the presidency and both houses of Congress is now perhaps more likely.
This could be highly consequential for investors.
Given free rein, the Democratic fiscal stimulus is likely to be huge, perhaps as much as $5 trillion. While some of the immediate effort is likely to be directed at protecting jobs and incomes in response to the ongoing coronavirus crisis, there is also likely to be a long-term, pro-growth boost, directed at debt relief for states, infrastructure, renewable energy and the 5G rollout.
Strategically oriented fiscal spending could very well have a positive effect on economic activity and help bolster the recovery. That would be market-friendly; however, as always, someone has to pay for it.
Biden’s proposed tax hikes are quite significant, and if implemented in 2021 could very well offset the positive effects of fiscal spending. Analysts estimate a potential 9 – 10% tax hit to S&P 500 earnings per share. Individual income and capital gains tax increases may also have a dampening effect on economic growth and markets. Our hope is that tax increases, which seem inevitable in a Biden administration, would be phased in over time to allow the economy to heal.
We would also watch regulatory policy, which could weaken CEO and small business confidence, and thus reduce corporate investment in productive capacity. Even without controlling the Senate, Biden, like Trump, could do a lot on regulation via executive orders.
It is difficult to imagine a sharper turnaround in these areas from what we have experienced over the past four years, particularly in tax and regulatory policy. Consensus in markets right now is that either the status quo or divided government would be friendlier to equity markets than a blue sweep.
We would acknowledge that higher taxes and tighter regulation could dampen investor psychology and therefore hurt price-to-earnings multiples. But we would add that, if the tax and regulatory tightening are phased in gradually, it could make the tailwind for equities less stormy than some anticipate.
Don’t Forget the Virus
Given the magnitude of the economic shutdown, better news on the coronavirus would likely overshadow the short-term effects of the election. The resumption of normalcy for the global economy would likely be a powerful driver of markets given the implications for consumer and corporate incomes.
Nonetheless, we believe both the virus and the election are highly consequential for the long term, and, like the many investors who appear to be hedging against November volatility, we are keeping risk levels in check given their volatile nature and the range of potential outcomes.
If we, our clients and other investors have one message for our presidential candidates, it could be this: One of you will lead a $22 trillion economy for the next four years; it would be nice to hear some proper discussion about what you plan to do with it—and why.
In Case You Missed It
- S&P Case-Shiller Home Price Index: July home prices increased 0.6% month-over-month and increased 3.9% year-over-year (NSA); +0.6% month-over-month (SA)
- U.S. Consumer Confidence: +15.5 to 101.8 in September
- China Purchasing Managers’ Index: +0.5 to 51.5 in September
- U.S. 2Q 2020 GDP (final): -31.4% annualized rate
- U.S. Personal Income and Outlays: Personal spending increased 1.0%, income decreased 2.7%, and the savings rate decreased to 14.1% in August
- ISM Manufacturing Index: -0.6 to 55.4 in September
- U.S. Initial Jobless Claims: +837,000 for the week ending September 26
- U.S. Employment Report: Nonfarm payrolls increased 661,000 and the unemployment rate decreased to 7.9% in September
- Eurozone Consumer Price Index: -0.3% year-over-year in September
What to Watch For
- Monday, October 5:
- Markit Eurozone PMI
- Eurozone Retail Sales
- Tuesday, October 6:
- ISM Non-Manufacturing Index
- Thursday, October 8:
- U.S. Initial Jobless Claims
Statistics on the Current State of the Market – as of October 02, 2020
|S&P 500 Index||1.5%||-0.4%||5.1%|
|Russell 1000 Index||1.8%||-0.2%||6.2%|
|Russell 1000 Growth Index||1.4%||-0.8%||23.3%|
|Russell 1000 Value Index||2.2%||0.5%||-11.1%|
|Russell 2000 Index||4.4%||2.1%||-6.8%|
|MSCI World Index||1.6%||-0.2%||1.9%|
|MSCI EAFE Index||1.6%||0.0%||-6.7%|
|MSCI Emerging Markets Index||2.2%||0.0%||-0.9%|
|STOXX Europe 600||2.9%||0.4%||-7.3%|
|FTSE 100 Index||1.1%||0.7%||-19.7%|
|CSI 300 Index||0.4%||--||14.2%|
|Fixed Income & Currency|
|Citigroup 2-Year Treasury Index||0.0%||0.0%||3.0%|
|Citigroup 10-Year Treasury Index||-0.3%||-0.2%||12.3%|
|Bloomberg Barclays Municipal Bond Index||-0.1%||-0.1%||3.2%|
|Bloomberg Barclays US Aggregate Bond Index||-0.1%||0.0%||6.7%|
|Bloomberg Barclays Global Aggregate Index||0.4%||0.0%||5.7%|
|S&P/LSTA U.S. Leveraged Loan 100 Index||-0.2%||0.0%||-0.6%|
|ICE BofAML U.S. High Yield Index||0.9%||0.1%||-0.2%|
|ICE BofAML Global High Yield Index||0.9%||0.1%||0.6%|
|JP Morgan EMBI Global Diversified Index||0.1%||0.1%||-0.4%|
|JP Morgan GBI-EM Global Diversified Index||0.7%||0.2%||-6.1%|
|U.S. Dollar per British Pounds||1.8%||0.1%||-2.4%|
|U.S. Dollar per Euro||0.8%||-0.1%||4.4%|
|U.S. Dollar per Japanese Yen||0.3%||0.2%||3.2%|
|Real & Alternative Assets|
|Alerian MLP Index||2.5%||0.5%||-45.9%|
|FTSE EPRA/NAREIT North America Index||6.3%||4.6%||-16.7%|
|FTSE EPRA/NAREIT Global Index||4.4%||2.6%||-17.4%|
|Bloomberg Commodity Index||-1.2%||-1.5%||-13.4%|
|Gold (NYM $/ozt) Continuous Future||2.2%||0.6%||25.2%|
|Crude Oil WTI (NYM $/bbl) Continuous Future||-8.0%||-7.9%||-39.3%|
Source: FactSet, Neuberger Berman.