Presidency + Senate + House = Policy
The policy outcomes of the election are more nuanced than just Biden V. Trump
There are several permutations of dominance that will drive policy possibilities
Each combination provides insight into likely outcomes and how they will affect the markets
Like all presidential elections, the upcoming election brings the possibility of radical change in federal policy. Markets like certainty, and nothing breeds more uncertainty than the potential of a “blue wave” or “red wave” sweeping the political landscape. Outlined below are several possible policy outcomes and the market impact depending on which party controls the Presidency, the Senate, and the House of Representatives going into 2021.
The trade war has faded from the headlines since the spread of Covid-19. Beginning in 2017, President Trump and his key advisors stated in several interviews that a key goal of his administration would be confronting China to turn back the globalization of the past 30-40 years. As a result, markets were wracked by volatility as President Trump and his Trade Representative Robert Lighthizer waged war on most of the United State's trading partners. A “red wave” Trump re-election would mean a return of these trade wars, which have been temporarily sidelined by the COVID-19 pandemic. This would be negative for domestic equities, as much of the gross margin gains made in the large-cap U.S. equity space came from outsourcing expensive labor from the U.S. to cheaper labor overseas. The resumption of the trade wars would also be negative for international equities by directly hurting the competitiveness of international corporations in the United States. A “blue wave” Biden victory would see an end of the trade wars and a return to globalization, which would be positive for equities in the U.S. and internationally.
In the fixed income space, there will likely not be significant market moves regardless of the election outcomes. The Federal Reserve’s outsized role in the fixed income markets, namely their expansion earlier this year into corporate lending and the municipal markets, implies that their actions will drive market returns going forward. Like all actions of the government, there is nothing more permanent than a “temporary Federal Reserve program”. The main problem with any Fed stimulus is that market participants adapt to new conditions and change their behavior. Removing the stimulus may cause volatility and lower market returns. Because the Fed’s mandate includes market stability, it is unlikely they will unwind any of their programs in the near term.
Within commercial real estate, the greatest impact of political change will be new developments regarding the current and future COVID-19 lockdown policies. Should there be an increase in lockdowns, commercial real estate will be greatly pressured if rent payments falter, distressed companies default on their mortgage payments or tenants move to a more permanent work-from-home work environment. A good example of this is Microsoft, who recently announced they will offer work-from-home to all their employees going forward irrespective of the pandemic. If we see a “red wave”, the stimulus to support distressed companies will likely be smaller than that under a “blue wave”. In residential real estate, the ultra-low interest rates driven by the Fed will broadly support the housing market as borrowing costs remain low. However, while the housing market in aggregate will be supported, there will be regional selling pressure due to relocations from major metropolitan areas like New York and parts of California to less populated areas. The only policy concerns in this space would be a “blue wave” that results in higher taxes, which will lower the spending power of wealthy households and may result in some downsizing.
Finally, there is massive government spending planned by both presidential candidates, regardless who wins. This will likely continue to depress the dollar across all scenarios, with the exception of a Biden presidency and a sizeable Republican presence in Congress. In this scenario, the Republicans in Congress will return their messaging of fiscal conservativism and concern over the deficit, as they position themselves for the 2024 campaign. This outcome implies lower stimulus spending, something the markets want badly. Additionally, if the national conversation returns to worries over the budget deficit, this will likely be positive for the dollar as profligate government spending is anticipated to decline.
It is our view that the election results and their impact on the markets are more nuanced than that of the current dominant narrative. If you would like to discuss further, please reach out to us at 281-886-3039.
Christopher Lloyd, CFP®, is a Vice President, Senior Wealth Planner, Portfolio Manager and Co-Founder of Lloyds Intrepid Wealth Management. Since 2014, he has held positions as an analyst, trader, wealth planner and business developer, while working at Chilton Capital Management, Merrill Lynch and Lloyds Intrepid Wealth Management. For a complete resumé, visit his profile at LinkedIn.
Chris holds a BS in Economics from Texas A&M University.
Chris is a Certified Financial Planner™ certificant.
Lloyds Intrepid LLC is doing business as Lloyds Intrepid Wealth Management. Lloyds Intrepid LLC offers investment advisory services in the State of Texas where registered and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. Lloyds Intrepid LLC and its advisers do not provide legal, tax or accounting advice. Lloyds Intrepid LLC formulates retirement plans, investment strategies, portfolio construction and investment due diligence for clients with signed investment advisory agreements with us. The information contained herein has been obtained from sources believed to be reliable, but the accuracy of the information cannot be guaranteed. All opinions and outlooks are subject to change.
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