Jonathan Marriott, Chief Investment Officer
The last week has seen extraordinary developments in US politics, but does it change anything?
Last week, we reported on the impact of President Trump being diagnosed with COVID-19, when markets initially dipped and then recovered. Mr Trump says that his health dipped and then recovered and that he now feels totally fit. He may yet have a relapse, but his rapid recovery may be down to the cocktail of drugs he was given, some of which are not approved for general use. The White House event to announce the nomination of Amy Coney Barrett to the Supreme Court, where guests mingled without masks or social distancing, has become the centre of a cluster of cases. In a deeply divided America, Trump is either a hero who has battled and won or an irresponsible leader who does not care for anyone else but himself. Opinion polls may not be reliable, however, they indicate that not only will Biden beat Trump, but that the Democrats will gain control of the Senate whilst retaining control of the House of Representatives, a so-called "blue wave". It is curious that the left of American politics is associated with the colour blue and the right red, the reverse of most other countries.
If Mr Trump is to turn this around, he needs something radical and he will no doubt continue to lash out at the opposition and make surprise announcements. The Democrats and Republicans have been deep in negotiations over the next stimulus package. The President abruptly cancelled negotiations until after the election. After the stock market fell 2%, he partially relented saying he would sign a bill to send $1,200 cheques to everyone in America and another to provide support to the airline industry. If this is a tactical move to blame the Democrats for the weak economy, it may backfire. He says, if re-elected, he will provide a huge stimulus package after the election. However, the Democrats were proposing a $2.2 trillion stimulus package and the Republicans only wanted $1.6 trillion. Despite Trump's word it may still be possible for at least a partial deal before the election but it will be difficult.
Trump now believes he is a COVID-19 expert and will make the experimental drugs he was treated with freely available for all. Amongst other things, he was treated with REGN-COV2, a mix of antibodies that fights the virus. This drug is made by Regeneron, who have 50,000 doses ready, and could make 350,000 in a few months. With around 50,000 new cases a day in the US, not all patients will get this treatment for a long time, even if it were to be approved.
The President needs to grab attention and the Presidential debates could be a forum for this. Following his illness, the commission that organises the debates has proposed doing the next one remotely. Trump has rejected this, proposing a change of date instead. As a result, the two remaining debates may not happen. Given that the first debate was so chaotic, this may not be a bad thing. For now, the Democrats look as if they are heading for the blue wave and we need to reflect on what this means for investors.
The Democrats have said they will reverse many of the tax cuts that the Trump administration has introduced. They are also likely to revive a green agenda on environmental policy. Wall Street could take both these factors badly. However, as noted above, they propose a larger stimulus package than the Republicans to stimulate the economy. Trump's aggressive policy on Chinese trade has called into question global supply chains and we can expect a softer tone on this which may help stock markets in the US and Asia. The Democrats may borrow more, thus increasing supply of Treasuries and threatening higher long-term borrowing costs, but, while the pandemic continues, this may be offset by Federal Reserve purchases. Markets don’t like uncertainty and Trump's Twitter account has the ability to move markets. A less frantic and more predictable White House would be easier for investors to deal with.
Thus a blue wave may not be bad for investors. If Trump were to be re-elected, then that would also not be outright negative for markets. The danger for markets in the short run is a disputed election, which could see a period of post-election infighting that would bring any further fiscal support into question as the pandemic crisis continues. President Trump has said that he will only accept the result if he wins. He disputes the validity of postal ballots that tend to favour the Democrats. The pandemic means that there will be more postal votes than ever. Last time, Trump lost the popular vote but won the Electoral Colleges. Individual states that send delegates to the Electoral College use different methods of voting and each state may be individually contested, delaying a final outcome. These disputes may end up at the doors of the Supreme Court, hence Trump's enthusiasm to get his nominee approved ahead of the election.
Clearly the remaining period leading up to the election will add to volatility in markets, but in the end the impact may not be that large. Monetary and fiscal support will remain. With interest rates low, equities will still be the favoured asset class. Progress on treatments and vaccines are likely to be more important for sentiment than votes in the US election.
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