The Irrelevant Election

With voters so divided and angry, the outcome on November 3 will be consequential for many reasons—just not for the stock market.

Conventional wisdom holds that Democrats are bad for stocks, with an agenda including taxes and regulation that whittle away corporate earnings. The actual record of America’s two major parties is much more mixed, but as recent polls and prediction markets point to victory for former Vice President Joe Biden, it is striking that the S&P 500 has barely paused for breath.

What gives?

Much remains uncertain about the economic agenda of a possible Biden Presidency. The broad direction will likely advance traditional Democratic impulses through more taxes on the wealthy and corporations and more spending on everything from schools and roads to the poor and elderly. If anything, the list of priorities has only grown longer in the last few years to include large investments in clean energy and climate change mitigation. It has extended further still in recent months to encompass the needs of families and small businesses devastated by the Great Lockdown.

Some have seen market jitters in the rising price of S&P 500 puts for November and December, ostensibly in anticipation of a sell-off following a Biden win. But the likeliest explanation for the election’s apparent irrelevance to stock prices is this: for all the differences in personality, priorities and vision, America’s macroeconomic policy will not be very different under either candidate. 

First, regardless of the election’s winner, Jerome Powell and the Federal Open Markets Committee will still not be “thinking about thinking about raising rates,” as the Fed chair himself put it. Indeed, other than the taming of the coronavirus itself, Fed policy remains the most important driver of market sentiment and won’t be changing anytime soon.

Second, while it’s hard to predict the makeup of the next Congress, the overall trajectory of fiscal policy will not change substantially either. The current course of generous spending and large deficits seems most likely to support what will still be a badly damaged economy. Even if Democrats seize control of Congress and the White House, massive new spending will be limited by Republican Senators who will likely retain the 40-plus seats required to block significant changes to the 10-year budget window. Alternatively, even a Republican sweep will not deliver a mandate for fiscal rectitude given the president’s demonstrated preference to goose the economy over balancing the budget.

Third, there are far more powerful forces that will shape the economic recovery next year. How much has COVID-19 been contained? Have we identified vaccines and better treatments? How close to the new “normal” are we? As the U.S. returns to work, investors are focused intently on whether unemployment next year will settle closer to May’s 13.3% or February’s 3.6%.

Of course there will be major differences in outcomes for key sectors in the economy and among varying stocks. Biden’s climate agenda would likely hurt the fossil fuel industry while supporting firms developing alternative energy. His ideas about bolstering labor unions and raising the minimum wage may dent the profitability of large industrial employers. His anti-trust proposals might impose new restrictions on market darlings in the tech sector.

“The likeliest explanation for the election’s apparent irrelevance to stock prices is this: for all the differences in personality, priorities and vision, America’s macroeconomic policy will not be very different under either candidate.”

But the differences are not anywhere as sharp as either camp would have you believe. Trump has also supported minimum wage increases at times, and he is clearly not afraid of going toe-to-toe with tech, including Twitter’s fact checking and anything Amazon and its founder and CEO have done. Both candidates have called for massive new infrastructure spending. Both favor controls on drug prices. Both tilt toward confronting China, even if their styles differ substantially.

As to the conventional wisdom about stock markets and election outcomes, the actual record is quite mixed. Stocks tend to underperform in the fourth year of Republican administrations, ostensibly out of concern that a Democrat will tax anything that moves. Since 1976, however, average annual stock performance under Democratic presidents has exceeded the record of Republicans, although some point out that George W. Bush hurt his party’s average following the Lehman Crisis. (The final tally for Trump’s first term may or may not change this.)

With many weeks and news cycles before November 3, the market may start to react more to the polls as this weird Zoom-powered, socially distanced campaign heats up. Biden will speak more of a Democratic agenda that has shifted further left during the primary. Trump’s escalation of tensions with China may spook markets for different reasons.

Still, stocks’ movements seem likely to react to these headlines only briefly as investors continue to weigh the lingering damage of a once-in-a-lifetime pandemic. Our level of comfort going to a movie will do more to shape corporate earnings next year than anything the Leader of the Free World might decide.
 

JOE BIDEN POLL AVERAGE VS. S&P 500

Source: Bloomberg. As of June 17, 2020.