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Who’s Afraid of the Big, Bad Blue Wave?

Fourth Quarter 2020 
By Michael Medeiros, CFA

The upcoming election has some investors wary of a blue-wave outcome and what it might mean for markets, but fiscal policy is likely to be more impactful.

Insight from our sub-adviser, Wellington Management
Michael Medeiros, CFA
Macro Strategist

With the US elections only a few weeks away and Former Vice President Joe Biden, the democratic nominee, holding onto a comfortable lead in most polls, the prospect of a so-called “blue-wave” scenario—where Democrats win the White House and seize control of both houses of Congress—looks more and more plausible with each passing day. (Granted, polls are notoriously fickle, and a few weeks is an eternity in politics; anything could still happen between now and November 3.)

Many investors are wary of a blue-wave outcome, fearing it could spell bad news for the US economy and markets. But would it really? After taking a closer look at some of the details, I’m not so sure.

Conventional wisdom says Democrats are less “market-friendly” than their Republican counterparts, but this isn’t just any election cycle. A distinguishing feature of today’s extraordinary environment is the role of fiscal policy to help combat the COVID-19 crisis. A large dose of fiscal stimulus has already been injected into the economy, but there’s likely more to come under either new president. The difference lies in how stimulative fiscal policy would be.


A Closer Look

We now have more granularity around fiscal policy proposals from both President Trump and Biden, and potential implications for the economic outlook in 2021 under each candidate. Of course, not everything being proposed will necessarily become reality. (Trump’s proposals in particular, especially the tax cuts, are unlikely to be fully implemented because Republicans are a long shot to take the House of Representatives.) And context is important here: The prevailing growth and public-health backdrop will affect the timing and magnitude of fiscal measures.

But, it’s at least possible now to set some parameters around what to expect post-election (FIGURE 1):

  • Trump might slash spending by about 0.3% of US gross domestic product (GDP) and try to push through further tax cuts amounting to 0.9% of GDP, leaving fiscal policy stimulative, but only by about 0.5%.
  • Fiscal policy should be more stimulative following a blue wave than with Trump and divided government. Biden could up spending by around 3.4% of GDP per year (mainly on infrastructure, healthcare, and education), offset with a 1.9% of GDP tax increase.
  • That said, the policy mix resulting from a Democratic sweep may be less market-friendly, as corporate, individual, and capital-gains taxes could rise, along with greater regulation.


Figure 1

Fiscally Speaking: Biden vs Trump Proposals

  Biden Trump
Component (US$ bil, 2021 - 2030) GDP% (US$ bil, 2021 - 2030) GDP%
Infrastructure 2,390.0 1.1 1,084.0 0.5
Education 1,906.4 0.9 -170.0 -0.1
Social safety net 1,498.5 0.7 -485.0 -0.2
Healthcare 1,475.0 0.7 -928.0 -0.3
Spending 7,269.9 3.4     -737.1 -0.3
Individual 963.1 0.4 -1,517.6 -0.7
Payroll 997.6 0.5 -172.0 -0.1
Corporate 2,138.5 1.0 -200.5 -0.1
Taxation 4,099.2 1.9 -1,890.3 -0.9
Net fiscal 3,170.7 1.5 1,153.2 0.5

Sources: Moody’s Analytics, Biden and Trump presidential campaigns, JTC, PTC, US Treasury, CBO, DOL, SSA, CRFB, OMB


Final “Blue Wave” Thoughts

From an economic growth and market perspective, I believe fiscal policy would be more supportive under a blue-wave scenario. And I think the US Federal Reserve would have a similar interpretation of a Democratic sweep, which in turn could influence monetary policy going forward. The economic impact of additional fiscal stimulus could also be a catalyst for higher long-end bond yields on a medium-term basis.


Access our latest election insights at hartfordfunds.com/election

Important Risks: Investing involves risk, including the possible loss of principal.

The views expressed herein are those of Wellington Management, are for informational purposes only, and are subject to change based on prevailing market, economic, and other conditions. The views expressed may not reflect the opinions of Hartford Funds or any other sub-adviser to our funds. They should not be construed as research or investment advice nor should they be considered an offer or solicitation to buy or sell any security. This information is current at 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.

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