With the Democratic convention behind us, and the Republican convention drawing to a close, we are being asked what seems like a simple question – “What are the implications to both the markets and the economy if Trump wins or if we have a change in leadership and Biden prevails?”
The question sometimes includes the same query for the House and Senate. We are not pollsters and can’t add much by way of assigning probabilities to the various scenarios. To answer these questions, let’s start with a baseline assumption:
The Democrats retain control of Congress
The Republicans retain control of the Senate
I’ll say it once for the record—nothing we are communicating in this thought piece is necessarily what we want to happen, hope will happen, etc. etc. We are economists and money managers, so our job is to determine as near as we can how all this impacts your investments, full stop. Trust me when I tell you the team has widely disparate personal philosophies and views on everything from social issues to fiscal policies – which often makes for spirited debate, but we strive to separate this element from the work at hand.
Scenario 1: Trump Re-Elected; Congress Split
It seems clear to us that with no change in the House and Senate control and a Trump re-election, we should expect a continuation of the polices of the last 4 years. That is not to say the results will be or even could be the same as they were pre-COVID. We are on record with the view that notwithstanding the downright astonishing asset market behavior, there is real and as yet unseen damage to the real economy both here and around the world. In some areas posting seemingly strong economic results will be easy due to comparisons based on statistics from a month, quarter, or year ago. But until the fullness of time reveals things like the extent of small business bankruptcies, permanently or prolonged segments of unemployment, impact of the stimulus debt burden, etc., it will be difficult to truly measure degrees of economic recovery. In summary, no matter who wins the Presidency, the debate over the true state of the economy will continue, while the seemingly requisite blame game will no doubt persist.
Scenario 2: Biden Elected; Congress Split
Now let’s ponder the implications of a Biden win. History tells us that the economy and markets actually do better under Democratic administrations. According to an article by Brad McMillan of the Commonwealth Financial Network, the Dow Jones Industrial Average returned an average annualized rate of 3.5% when Republican’s held the Presidency, and 6.7% under Democratic rule. Your response to this is likely the same as mine: “Interesting. Don’t care”. This is a great factoid for party conversation but nothing I would build an investment strategy around (especially in the COVID world with unprecedented dissention and social agitation of this time). Further, we would be hard pressed to try to make a case that the economy has fared markedly better under either parties’ governance – in the end as with so many things, it all depends on a myriad of other factors making these sorts of comparisons suspect at best, and useless in reality.
The questions raised by many that are tinged with concern over a potential Biden win seem largely rooted in the uncertainty of policy proclamations of a truly historic and sweeping nature; watershed type ideas like the Green New Deal that are equally difficult to forecast.
So why am I not worried about these scenarios? Here is a short tick-list of points:
1) I doubt the election will have a truly clear winner. All of the issues (such as mail-in voting) are concocted to lay the ground work for cover for both sides rejecting the results, which I fear will likely result in a significant delay in the final outcome and probably require high court proceedings to resolve. Neither party will have anything like a clear mandate to govern and will have to drag the other half of the country in some cases literally kicking and screaming for the next 4 years. Fun.
2) I believe there is a crevasse between what Biden says he will do, and what he might actually attempt to do. A nice way of saying that politicians (all of them) have a way of making a lot of lofty promises, then blaming the other side for not even attempting many of them.
3) I see a gulch between what a Biden administration likely attempts to accomplish and what they can get done. Even if the Democrats were to win the Senate, they likely would not have a filibuster-proof majority and likely could not rely on all the Democrats to vote for anything radical. Can you say “mid-term election in 2 years’ time”?
4) My expectation that anything truly seismic will be met with an immense lobbying resistance and then legal challenges that will draw out, dilute, and generally confound anything fundamentally transitionary.
5) And then there is the time to implement – the government moves slowly on most things, and even slower on big, complicated things.
6) My expectation, and here history is pretty reliable because it rests on human nature, that major change in 2020 will be met by a significant push back in the 2022 mid-term election.
In conclusion, there is a lot of bluster in politics, and agenda items take much longer to implement than expected. Campaign promises are narrowed down; legislation is written, then debated, and perhaps stalled. Perhaps the courts weigh in, and we still have yet to actually implement anything. And then Congress goes on recess where they will be fundraising and making more promises before mid-terms. We all know there is one thing our elected officials are good at, and it’s raising money and staying in office. On net, we expect a lot of business as usual in Washington, which means on the margin not a whole lot gets done which is why we are not concerned about the outcome of the election.
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