(ATF) Writing about the market implications of presidential election scenarios typically involves analyzing which sectors are best positioned to benefit from Democrat or Republican campaign platforms. But this isn’t your typical election cycle with COVID-19 surging again in the U.S. and widespread concerns about the type of recovery we can expect across the global economy. The current investment landscape is by far the most unusual period in my 25-year career on Wall Street.
Conventional wisdom is that a “Blue Sweep” by the Democrats, under Joe Biden, to take control of the Oval Office and Senate while maintaining control of the House, would be negative for economic growth. The same holds for a “Blue Tide” with Biden becoming president while Democrats and Republicans maintain majorities in the House and Senate, respectively.
Let me explain why I disagree.
The two parties have one big thing in common that helps frame the market implications of Election 2020: their willingness to embrace deficit spending. Both parties are keen to spend the US out of the crisis and let the future deal with the implications.
Fiscal stimulus under the Trump administration was a steady trend well before COVID-19 necessitated the extraordinary economy-wide relief programs. Policies like the sweeping tax change of 2018 are hallmarks of his administration. Republicans want more of the same over the next four years. But no matter who controls the White House in 2021, taxes will need to rise as the nation grapples with the aftermath of COVID-spending.
Biden essentially proposes the exact opposite of the Republican platform. He wants to increase corporate taxes and taxes on high-income individuals while tightening financial regulations. Elsewhere, the Democrats remain committed to their historical ethos of federally-funded programs that pump up the demand side of the economy. For Biden, technology and the environment are of particular focus.
Nothing is guaranteed, of course. What is said during a campaign and the reality of what is implemented once in office, are two completely different things – it’s politics after all. This discrepancy is likely to be even greater due to the uncertainty and costs associated with COVID-19.
The following are possible scenarios and the potential impact on different sectors of the U.S. economy, listed in order of likelihood.
Blue Sweep: A Biden presidency and Democratic House and Senate
A Biden presidency in a Democratic sweep would pave the way towards a more progressive agenda fuelled by expansionary fiscal policy. In this scenario, healthcare reform and a new drug pricing bill are on the table, as is an infrastructure bill. Tax changes would likely include repealing state and local tax (SALT) deduction and higher rates for high-income individuals. Also, expect tighter environmental and financial regulations, as well as renewed multilateral outreach and new approaches to the trade conflicts.
- Positive for: renewables, non-US energy, large managed care, transportation.
- Negative for: US energy, IT hardware, internet, pharmaceuticals, telecom, tobacco and asset managers.
Blue Tide: A Biden presidency, Democratic House and Republican Senate
Biden in the White House and Democrats controlling the House but not the Senate means Washington is likely to experience gridlock. In a “Blue Tide” government, transformative fiscal support is unlikely. More likely would be a continued push to rebuild international relationships, regulations that promote technological innovation, environmental protections and moves to keep Wall Street in check. A bevy of executive orders are possible in this scenario, but those are limited in scope and often get caught up in the courts, which now tilt conservative.
While there are still areas of the market that are likely to benefit, without the fiscal support, this scenario is likely to be less supportive for markets.
- Positive for: renewables and non-US energy sectors.
- Negative for: US energy, IT hardware, internet, pharmaceuticals, telecom and tobacco sectors.
Red Tide: A Trump presidency, Republican Senate and Democratic House
In a repeat of the current executive and legislative breakdown, expansionary fiscal policy is possible, but it would likely mirror what we see now: reactive in nature, driven by the continued economic fallout from COVID. Regulatory action from the executive branch would likely continue to focus on areas like immigration and protectionist policies.
- Positive for: asset managers, telecom, US energy.
- Negative for: renewables.
Red Sweep: A Trump presidency and Republican House and Senate
Currently the least likely scenario, Republicans in full control would mean more of the same fiscal policy tactics, only expedited. Another round of corporate-friendly tax cuts and easing of environmental and financial regulations could be in the cards. And US protectionism would likely increase further, with continued moves away from global partners. The sectors affected positively and negatively would be the same as for a “Red Tide.”
The Great Unknown: Where COVID Goes from Here
The biggest question for the short and long terms is how quickly, if at all, an effective vaccine can be developed, tested, and distributed safely. Until then, a more coordinated federal response to containing the disease would help clarify the economic picture in the US.
The shape of the economic recovery and the investment landscape will be determined by the timing of a vaccine relative to the continued spread of the disease and what the US. does, or does not, do to manage its way out of the crisis.
A lack of action will extend the sickness plaguing the economy. On the positive side, just as certain sectors and themes mobilized to help economies operate in these unusual times, adjustments to current strategies to contain the disease could dramatically affect the trajectory of the recovery and the future.
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