Market Perspectives October 2020


A Consequential Election

The U.S. Presidential election is expected to have big implications for markets – fiscal stimulus, public investment, taxation, regulation, and foreign affairs. We anticipate markets focusing on presidential debates, U.S. consumer confidence and employment numbers later this week.

This time around, the U.S. election has a backdrop unlike any other – pandemic, recession, and racial tensions. Whatever the outcome, America may be stuck with significant implications.

Democratic nominee and former Vice President Joe Biden took the stage with President Donald Trump on Tuesday evening for the first of three presidential debates.  According to national polls, Biden has a narrow lead, one that has been sustained all year. However, his lead is much narrower in decisive electoral states that present a tenable argument for the incumbent to be re-elected.

After the first debate, (hard to say who won, but easy to say who lost:  the American people) we believe three scenarios make sense and expect one of them to play out in November.

  1. The first, a Democratic sweep of the White House and Congress (with Democrats winning control of the Senate)
  2. Biden wins and Congress is divided
  3. Status quo – Trump wins

COVID-19 undeniably presents a very difficult landscape for the 2020 election. Sure, headwinds abound, but the pandemic has gripped the economy in a way that very few imagined, and frankly, the rebound is likely to take no less than a year.  Of the many challenges, one is mail-in voting.  We have already seen many affected areas.  For example, Brooklyn, NY said that as many as 100,000 voters could receive the wrong mail/ballot.  Election results, in our opinion, will not be known for some time following November 3.  In fact, it is plausible that days will turn into weeks, or even months.

So, the first debate is in the rearview mirror. Did you learn anything or gain insight as to the next President of the United States? Probably not, nor did we.  However, it seems likely that fiscal policy is one of the more critical areas to watch, as it has been helping bridge the economy through the COVID shock. At this point, it is safe to say that most leaders and people of power agree that more stimulus is needed to help a crippled economy get back on solid footing.

Scenario 1. Biden claims victory with a sweep of Congress – fiscal stimulus will have a much different outcome. The next round of stimulus would likely be largescale with emphasis on clean energy spending, transportation, and affordable housing.  Hoping to offset a multi-trillion-dollar stimulus is Biden’s promise to increase taxes for companies as well as individuals making more than $400,000 per year.

Scenario 2. A Biden win with a Republican-controlled Senate would lead to much less ambitious fiscal stimulus and infrastructure spending and no major tax changes. We estimate the net difference in fiscal spending between the two scenarios could be several percentage points of GDP over each of the next few years.

Scenario 3. Fiscal spending under a second Trump term would likely be somewhere in the middle of the aforementioned. The election result will have implications for the key geopolitical risks we track.


Other things to watch for in a Biden victory include foreign trade and a more predictable short-term agreement with China.  Nevertheless, the U.S.-China rivalry is not likely to be forgotten.  In fact, we estimate a continuation of bipartisan support for a more competitive stance on China. Even with a Biden win, he will not be able to ignore getting things right with China.  Biden made it clear in the first debate, the U.S. will unequivocally rejoin the Paris Agreement and focus necessary resources on climate change.

Contrasting the Biden objectives, President Trump will remain focused on finishing what he started with China:  eradicating COVID-19, healthcare, immigration, defending our men and women in uniform, term limits in congress, and last, but not least, continue his America First crusade.

So, everyone keeps asking: What happens to the stock market if Biden wins?  First, it seems too simplistic for this election to be won/lost based on a tax-centric message alone.  In a Democratic sweep scenario for example, investors would have to balance higher taxes and tighter regulation with greater fiscal support, and potentially, a more predictable foreign policy.

Knowing who presides as our Commander in Chief for the next four years is anyone’s guess – we will soon find out.  Following a prodigious upswing in recent months, stock market volatility is returning, and our best guess is elevated volatility as we await one of the most consequential elections of our time.

For now, we do not see much hope for a new U.S. fiscal package before the election. The pandemic is still spreading in many countries, and U.S.-China tension is persisting.

The Bottom Line: We are dealing with a number of challenges, but America is resilient.  When the going gets tough, American gets going.  However, we expect continued bouts of volatility heading into the last quarter of 2020. For now, we remain optimistic and positive on equities over bonds.  Prudently, we are rebalancing our strategies more often and taking gains off the table when conditions warrant.  Times like these tend to send investors running for doors.  Our perspective, however, is one that calls for a long-term approach with the right amount of risk for each client’s situation.  Severe shocks in the market are nothing new, and we have not seen the last one.  However, each occurrence generally proves to be an opportunity for repositioning and buying equities that become severely undervalued.