The US election run-up has begun in earnest. With the Democratic and Republican conventions behind us, the presidential debates coming up, and less than two months to go until voters cast their ballots, investors around the world are increasingly asking how this momentous event may affect the economy and markets. I recently spoke with Mike Medeiros, Wellington Management’s US political expert, about top-of-mind election-related questions and how investors might position for November and beyond.
Nanette: Who do you think will win the presidential race?
Mike: Based on the latest polling (which we know isn’t foolproof), President Donald Trump is trailing former Vice President Joe Biden in the national polls by around eight percentage points and by an average of five points in key swing states such as Florida, Pennsylvania, Michigan, and Wisconsin. Combined with Biden’s stable polling numbers and favorability ratings, along with relatively few undecided voters at this stage, Biden is narrowly favored to win both the popular vote and the electoral college, but I expect the polls to tighten going forward given the speed and emotional intensity of current events, as well as the upcoming debates.
So investors should be thinking about three potential scenarios: A Trump win, a Biden win with a split Congress, or a Biden win with Senate control flipping to Democrats (the so-called “blue wave”).
Mike: What are the implications for the economy and market in each of those scenarios?
Nanette: I think there are pros and cons to each scenario. Here’s how I would summarize the potential outcomes:
|Scenario||Economic Implications||Risk-asset1 Effect||Comment|
|Trump status quo||Continued low-tax/low-regulatory regime; increased spending; continued geopolitical uncertainty||Moderately positive||Markets like lower taxes and regulation but don’t like trade tensions.|
|Biden + split Congress||Somewhat higher taxes/more regulation; increased spending; more predictable trade/tariff outlook||Unchanged to moderately negative||Fiscal support will continue, but Congress may keep spending, taxes, and regulation in check. Trade policy should stabilize.|
|Blue wave||Highest taxes/most regulation; increased spending; more predictable trade/tariff outlook||Moderately negative to negative||Higher spending and taxes, but trade policy should be more stable.|
Nanette: What else could occur that the market isn’t focused on?
Mike: The biggest risk, in my view, is the enormous expected increase in mail-in ballots due to COVID-19, the challenge of processing them all by the deadline, and the potential for the results to be contested in a close election. This could take months to sort out, leading to a heightened period of uncertainty without a strong legal precedent for resolution.
Another risk is that, in a blue-wave scenario, the Senate filibuster2 could be removed. That would reduce the need for bipartisan compromise and potentially pave the way for a more progressive legislative agenda to be passed into law.
Finally, the market hasn’t yet focused on Biden’s potential cabinet selections should he win. Biden could choose Senator Elizabeth Warren for a high-profile cabinet post (perhaps Treasury Secretary), which I think markets would dislike given her support for tougher regulation of the financial sector.
Mike: Which areas of the market are likely to benefit under each scenario?
Nanette: Here are my thoughts on some of the potential winners and losers:
|Scenarios||Priorities||Potential Winners||Potential Losers|
|Trump status quo||Infrastructure||Value, retail, travel, materials, defense||Stocks reliant on global trade, renewables|
|Biden + split Congress||Infrastructure, climate||Renewables, transport, materials, municipal bonds||Telecom, technology, pharmaceuticals|
|Blue wave||Infrastructure, climate, healthcare||Renewables, transport, insurance, municipal bonds, small caps||Banks, pharmaceuticals, energy, technology, telecom, defense|
Nanette: What’s already priced into the market?
Mike: Some pharmaceuticals, financials, and industrials—sectors that could face greater regulation or less funding in the event of a blue wave—have underperformed the broader S&P 500 Index,3 which may partly reflect Biden’s improved chances of winning. However, other factors may be affecting the performance of these sectors. From a valuation standpoint, financials, pharmaceuticals, and cyclical industrials look more undervalued relative to their history and the overall market, while tech appears more vulnerable.
- Even more important to markets than who becomes the next US president will be whether Democrats can “flip” the Senate if Biden wins. A blue wave is the worst-case scenario for risk assets, in my view. On the other hand, additional fiscal stimulus might get through Congress more easily following such an outcome.
- The market seems less focused on the attendant risks of this election cycle. These include the election process itself and any potential irregularities or delays, as well as the risk of Senator Elizabeth Warren becoming Treasury Secretary with a Biden victory.
- The market’s election-related moves are still likely to be secondary to other catalysts, including COVID-19 developments and fiscal/monetary policy. Substantial liquidity (as evidenced by cash on the sidelines), ongoing support from the US Federal Reserve , and fiscal stimulus (so long as it doesn’t fade) should remain key tailwinds for the market.
The views expressed here are those of Nanette Abuhoff Jacobson and Mike Medeiros. They should not be construed as investment advice. They are based on available information and are subject to change without notice. Portfolio positioning is at the discretion of the individual portfolio management teams; individual portfolio management teams, and different fund sub-advisers may hold different views and may make different investment decisions for different clients or portfolios. This material and/or its contents are current as of the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management or Hartford Funds.
1 Risk assets (such as equities, commodities, high yield bonds, real estate, and currencies) have a significant degree of price volatility.
2 The legislative filibuster is a Senate rule that requires most bills to meet a higher threshold of 60 votes out of 100 to pass (rather than a simple majority), better enabling the minority party to block bills that it opposes.
3 S&P 500 Index is a market capitalization-weighted price index composed of 500 widely held common stocks.
Important Risks: Investing involves risk, including the possible loss of principal. • Investments in particular sectors may increase volatility and risk of loss if adverse developments occur. • Different investment styles may go in and out favor, which may result in under-performance of the broader stock market. • Fixed income security risks include credit, liquidity, call, duration, event and interest-rate risk. As interest rates rise, bond prices generally fall. • Municipal securities may be adversely impacted by state/local, political, economic, or market conditions. Investors may be subject to the federal Alternative Minimum Tax as well as state and local income taxes. Capital gains, if any, are taxable.