21 October 2020
We have the US general election coming up in the midst of a recession. This situation is complicated because the two completely polarised parties are trying to simultaneously vie for seats in Congress, win a presidential election, and fix the floundering US economy in the face of COVID.
This unique dynamic has both short-term and long-term implications for the market and economy: The economy is hurting as the fiscal stimulus spending is at a standstill due to political agendas, while uncertainty lingers as the potential results for upcoming presidential and congressional elections have such a wide range of market and economic implications.
As fiscal spending decisions are at a standstill and medium-term political uncertainty persists, we can’t do much more than make sure that we’re prepared and wait.
To be prepared, we need to know what’s potentially ahead of us. That required identifying the various potential election outcomes, and then identifying the market and implications of each of them. In Figure 1, we’ve first noted the Democrats and Republicans’ respective stances on particular topics, and then, by colour coding, we’ve indicated how each of their respective stances would help or hurt the market. What you’ll see is there’s no election outcome that’s absolutely great for the markets.
Generally speaking, one of the major points of contention between the US Republicans and Democrats is fiscal spending: Democrats tend to prefer larger stimulus packages, while Republicans tend to prefer smaller stimulus packages that direct aid toward specific areas of the economy, such as towards airlines and small business communities.
Recently, the Fed has been calling for more spending because the money multipliers are declining. In other words, the velocity at which money for payments and transactions from consumer activity moves around the economy is slowing down. In response, even the IMF, which traditionally has been a defender of fiscal discipline, has joined in the call for global governments to do more to help the real economy.
In response, the Democrat-led House passed a $3.4 trillion USD stimulus package, but then the Republican-led Senate subsequently rejected it. The back and forth seems to be hopeless because it’s overshadowed by the parties’ greater agenda: Winning the general election. So, the probability of a stimulus package being passed before the election is unlikely.
In the short term, a delayed stimulus package would likely result in unemployed Americans losing their unemployment benefits with no replacement until the new Congress settled down in February or March 2021. Losing these benefits would result in a further decrease in consumer spending; and given that 67.1% of the US GDP is made up of consumer spending, this would also be bad news for the markets.
If the Democrats sweep both chambers of the US Congress, there would be a high probability that a larger fiscal stimulus package would be passed. While this is good news for the broader stock market, this scenario also means that the Democrats would have a higher chance of being able to pass more stringent antitrust measures on big technology firms, thus affecting the recently record-breaking tech sector. (See Figure 2, in which we’ve illustrated what the three potential congressional election outcomes would likely mean for markets.)
The Democrat-led House has been busy over the last 16 months investigating antitrust issues with big technology firms. The House’s 449-page antitrust report stipulates that Amazon, Google, Facebook Inc., and Apple Inc. have abused their power to snuff out competitive threats, ultimately leading to less innovation, fewer choices for consumers, and a hobbled democracy. The antitrust subcommittee presented a dramatic proposal to overhaul competition law that could lead to the breakup of tech companies, if approved by Congress.
Now, in the scenario that the Republicans win both chambers of Congress, the fiscal stimulus package would be smaller, thus not giving the economy as much of a boost as it needs. But also in the scenario of a Republican-dominated Congress, the technology sector would benefit because the Republicans have been shunning the Democrats’ proposal to break up big technology firms. Further, a Republican sweep would result in longer-lasting hostile policies toward China and the battle for technological dominance would continue to escalate.
In short, there’s no election outcome that's a win-win.
What’s clear is that regardless of who wins the presidency and chambers of Congress, if each party retains one chamber of the Congress, the power dynamics will likely result in either a compromise or a stale-mate on key policies, as represented in the second row of Figure 2. In particular, there would be a negative impact on the economy if the Republican and Democratic parties remain unable to resolve their differences on the fiscal stimulus package.
As you can probably tell by now, analysing election outcomes and their potential impact on markets is a highly complex exercise. With the looming risk of a policy regime change, we don’t know which sectors and geographies are going to win and lose. That’s why maintaining a diversified portfolio-- not doubling down on a bet-- remains the best solution to navigate these macroeconomic uncertainties. For example, although it’s apparent that technology investments in the US offer long-term growth potential, be mindful not to make concentrated investments.
We don’t recommend speculating or making investment decisions based on one’s ability to predict election outcomes. Instead, analyse an event, such as the general election, for the purpose of evaluating tail risks and be prepared for such scenarios ahead of time.