It is time for markets to consider a Biden presidency
Head of FX Strategy
Summary: It is early days yet for the US presidential election cycle, given the magnitude of the shock that the Covid19 crisis has administered to the US economy and sentiment. But new polling tendencies and the terrible handling of the crisis by Trump point to a Biden victory in November. What this means for markets is far from clear, but long term investors need to have this on their horizon.
Despite some polling evidence leaning fairly heavily in favour of a Biden victory in the 2020 US Presidential Election, which we discuss in this article below, the odds makers are pricing very slightly higher odds of a Trump win. We will continue to watch the evidence in favour of either outcome over the next six months to November 3, but if market participants believe those “slightly-tilting-Trump” odds, then we are far from pricing any election outcome. That is important, because markets pre-position for anticipated outcomes, so if clear consensus on the outcome does eventually emerge, the trades will develop ahead of the actual election outcome, much less the policy reality out in 2021.
First, let’s have a look at some initial thoughts on the changes in policy mix under a Biden presidency and what those changes will mean for markets. As with Obama’s first term in 2009, and really as with Bush in 2001 and more dramatically FDR in 1933, a President Biden would take the reins in the midst of a growth and confidence crisis, even if the economy is well into a “opening up” phase from Covid19 shutdowns. The political situation will demand an intensification of government efforts to ease the strain on the economy, especially aimed this time, we believe, at the Democratic voting base.
Traditionally, left of center parties are more comfortable wielding the powers of government, so we would expect a very different and more direction response than has been delivered under Trump, whose moves were more supply-side in nature, with tax cuts and deregulation. A Biden administration would look very different as Democrats move to populate federal agencies with more competent and pro-government actors than was seen in Trump’s light touch administration.
On that note, here we present a few possible market impacts of a Biden presidency, with considerable amplification of the strength of each theme becoming possible if the Democrats are seen able to achieve the 50 seats in the Senate or more. (In a 50-50 tie vote situation, the Vice President casts the deciding vote).
Beware the huge US monopolies and their stocks – we have noted the incredible concentration of the US equity market in our daily Saxo Market Call podcasts – particularly the one this Monday ahead of this week’s blitz of earnings reports from the five largest megacap US internet- and tech giants. The five largest US stocks (at present Apple, Alphabet, Microsoft, Facebook and biggest of all, Amazon), at some 20% of US total market cap, have never been so large relative to the entire market, not even in the 2000 tech super-bubble. New record fortunes for the richest of the ultra-rich shareholders of these companies will not play well in the worst recession in modern memory that will see countless physical stores and small businesses go bust. Bad behavior has abounded from these monopolies and there is plenty of historic precedent in the US for monopoly busting, once the political will achieves critical mass. Before its earnings report this week, Amazon stock has achieved about a 600% return over the last five years and the market values is at $1.2 trillion, or over 5% of US GDP. At that scale, how many more multiples are really likely from here for the company, which is only slightly larger than Apple, Alphabet (Google), Facebook and Microsoft.
Main street to be prioritized increasingly over Wall Street. The above point on monopolies is really a sub-point of a likely tendency from a Democratic administration to favor wage earners – and the jobless, relative to banks and large corporations. In the Fed’s and US government’s response to the 2008-09 financial crisis, there was a justified public outrage on the scale of bailouts and how the Fed’s focus on asset purchases as the medicine to cure all evils as opposed to fiscal stimulus to benefit across the board accelerated worsening inequalities in income and wealth. President Obama seemed oddly obsessed with healthcare reform at the time rather than tapping justified populist outrage over the “socialization of all risks” that the bailouts produced and the lack of heavier fines or even jail-time for the worst offenders. Already this time around we are seeing the Fed engaging in moral hazard on an even greater scale in bailing out, for example, airlines that sent all of their cash flows into stock buybacks and stock options to reward management, leaving no buffers for a downturn in business. As the initial shock from this Covid19 outbreak subsides, the pitchforks will come out for the plutocrats, and Biden has rightly been making considerable noise about the lack of oversight on where funds during this furious pace of bailouts. A showdown between the “bailout everyone with a listed stock or a bad loan Fed” and the US government is a confrontation that only the government can win, once the new administration finds its stride.
Stock picking on a very different policy mix from the Trump “era” – a more demand driven policy response from a more activist government relative to the supply-side approach from the Republicans will make for a more challenging environment for stock-picking. Biden’s healthcare platform promises price negotiation for drugs, which could hit the prescription companies and the insurers more than pharma itself. Elsewhere, we would have said a Democratic presidency is bad for oil – but oil is so damaged already that there may be little downside potential there, rather a reduction in the upside potential. Elsewhere, besides our concerns about the big monopolies noted above, we suggest that companies involved in basic materials inputs and construction and infrastructure building will be big winners, together with alternative energy companies and companies involved in the reshoring of medical supplies and drugs and drug inputs after the Covid19 crisis woke the world up to supply chain disruptions and over-concentration of suppliers.
Inflation risks greater – in a Covid19 crisis world where perhaps 25% of the working population is finding itself unemployed – more than twice the worst unemployment rate ever recorded since the Great Depression – politicians will do whatever it takes to prioritize spending to keeping the population fed, employed and. Look for a Democratic policy mix to lean more explicit. Trump was already a kind of de facto MMT president, but the Republican policy mix leaned far more on supply side tax cuts and deregulation than explicit handouts. Trump was even looking to cut the food stamp program for millions of Americans before this crisis arrived. MMT and some form of more explicit nominal GDP targeting will feel more comfortable in Democratic policymakers’ hands.
Eventually USD negative – the conviction here is a bit weak, but all other things being equal, a Democratic president, especially one with both houses of Congress on side, will drive harder on overt monetary stimulus into the economy that will encourage more negative real rates. With the USD at a strong starting point, the downside potential versus other currencies is considerable.
About those polls and the 2020 election outcome – a view towards November 3rd.
The latest batch of political polls across the US are showing US President Trump’s mishandling of the Covid19 crisis are finally starting to wear on his popularity. This after the crisis initially saw the “rally around your leader” response that saw Trump’s approval ratings rising for much of March, in a kind of faint echo of the phenomenon that saw George Bush’s popularity soar in the wake of the 9/11 attacks. But unlike then, it has only taken a few weeks for Trump’s obvious missteps, including terrible predictions on the severity of the situation together with his shambolic discussions of the medical science around the outbreak, to make his reelection odds looking terminally compromised. His only hope – and it is not an inconsiderable one – is that the Democratic candidate Joe Biden is so incredibly uninspiring that voters simply choose to stay away from the polls on Election Day on November 3rd.
So while it is far too early in the process to feel strong confidence in the political outcomes here, the tendencies in the polling are clear. Yes, we know the polls “got it wrong” the last time around. But not as wrong as that simple assertion suggests: Trump lost the popular vote and by a wide 2.1% margin – or almost three million votes. His victory was entirely down to the patchwork nature of the US electoral map and how elections are determined more by region than by the absolute popular vote. Importantly, the tendencies against Trump are increasingly clear in important “swing” regions of the United States. Among these we can isolate three critical states that decided the election in Trump’s favour in 2016 by a few tens of thousands of votes: the mostly white, blue-collar states of Wisconsin, Michigan and Pennsylvania that were been bastions of support for the Democrats in every election from 1992 through 2012 – including through two Bush, Jr. victories in 2000 and 2004. but that broke for Trump. These three states can determine the outcome once again, and the latest polling results in them suggests that their revolt in favour of Trump in 2016 was something they have now strongly regretted. Just over the last week, two polls in Pennsylvania, worth some 3.7% of US electoral votes, showed sizeable 6- and 8-point margins in favour of Biden.
Chart: The 10 battleground states in the 2016 election
The chart below makes clear that it was a set of extremely narrow outcomes in three traditionally blue states of Michigan, Pennsylvania and Wisconsin that were the deciding factor in the election and allowed Trump to win. In US elections, it is always the situation in a handful of key “swing” states that determines election outcomes. Recent polling in Michigan and Pennsylvania suggests Trump is badly lagging Biden and for the 2020 election cycle, it is almost certain that these 10 states will determine the winner.
Another poll from Fox News in Michigan – perhaps the greatest Trump win in the election, showed a similar margin in favour of Biden. Elsewhere, no sufficiently recent polls are available for Wisconsin, but in Arizona, which narrowly went for Trump in 2016 as well and is carries slightly more weight than Wisconsin, the most recent poll from three weeks ago already showed a large 9-point tilt for Biden. A number of recent polls in electoral heavy-weight (5.4% of total) Florida also suggest Biden is leading by a narrow margin there. Shortly put, barring a terrible turnout (likely more important for House- and Senate- results) Biden looks set to become the next President of the United States.
Importantly, while it is obviously important to know who is going to sit in the White House if we are to determine the likely US policy mix going forward, it is perhaps just as important to know if both houses of US Congress will be Democratic as well. One of the key drivers of the immediate magnitude of the market reaction to the 2016 election outcome was that the White House and both houses of Congress went to the Republicans, allowing a clean slate to move on Republican priorities.
In the 2020 elections, the House is likely to remain in Democratic hands after the 2018 mid-terms saw an incredible turnout that ripped it from Republican control. But due to random coincidence, most of the Senate seats up for election in 2018 were already in Democratic hands, and a net of two were lost to the Republicans, resulting in a strengthened Senate Republican majority. The map for the 2020 election is more evenly divided, but the math is still difficult for the Democrats because so many of the Republican seats are in “deep red” Republican areas and the Democrat will have to take all four of the close races and probably at very likely at least one more due to deep-red Alabama likely losing its current Democratic senator (who narrowly won in a special election in 2017 despite running against a cartoonish, horse-riding, pro-Trump, sex-scandal plagued Republican candidate.
In short, we think the odds-makers have it wrong and that the evidence points strongly in favour of a Biden presidency, at least requiring market participants to consider what that means.