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Thursday 23 May 2019
Investment Talks, Perspectives
Director of Currency Strategy, US
The 2016 Presidential election produced one of the biggest upsets in US Presidential history. It was also one of only five elections since 1788 where the winning candidate lost the popular vote, but won the Electoral College. It was just another reflection of a deeply polarized electorate. Because of the lack of a popular mandate and very high unfavorable ratings, Trump never enjoyed a honeymoon. His net approval rating has never been positive. He has consistently had high negative approval ratings for most policy issues, while his rating is deeply unfavorable for attributes such as honesty and trustworthiness.
While Trump’s road to reelection remains challenging, his prospects for another term are not as bleak as might appear, based on an analysis of recent polling data and the patterns of previous elections. The market is starting to anticipate a Democratic victory, as evidenced by the recent decline in healthcare stocks over concerns about potential democratic reforms. However, it’s far too early to decide on the winner.
The US Presidential elections are 18 months away. However, in this era where politics and geopolitics are having a bigger impact on financial markets, we believe it is a perfect time to preview the Presidential race.
This paper examines four hypothetical election scenarios, likely key policy initiatives associated with each one, and potential economic and market implications. The wildcard that could alter the election dynamics at any time remains the fallout from the Mueller Report and other ongoing House and State investigations.
Uphill Odds for Trump
An analysis of the political fundamentals indicates an uphill road to reelection for Trump.
Many voters are not impressed with Trump personally. He has significant net unfavorable ratings in leadership attributes, such as temperament, trustworthiness and management skills by margins of -41%, -25% and -18%, respectively, according to a CNN poll (Mar.14-17, 2019). Overall, his unfavorable ratings outnumber his favorable ratings by a 2:1 margin.
He trailed in multiple areas, including education, healthcare, social security and the environment, according to a recent Politico/morning Consult poll (Apr.5-7, 2019). Despite Trump’s landmark achievement, the Tax Cuts and Jobs Act of 2017, he has a net disapproval rating on his handling of taxes from the Pew Poll (Mar.20-25, 2019). Recent polls suggest the Democrats have been successful at labeling the tax cuts as benefiting the wealthy.
However, Trump Has a Path
Despite Trump’s poor standing on key fundamentals, he has a path to reelection. Historically, a negative net approval rating has not necessarily been a deterrent to reelection. President Ronald Reagan was reelected with a net approval rating of -9%, not far from Trump’s current level of -11%. Conversely, a positive net approval rating has not necessarily translated to victory. President George H. Bush had a strongly positive net approval rating of +70%, but lost the election decisively to Bill Clinton. Trump’s trailing position at this early stage does not mean a loss on election day. Clinton won reelection despite trailing an unnamed GOP candidate at this point in the election cycle.
In a Quinnipiac Poll (Mar.21-25, 2019), Trump enjoyed a net favorable rating for personal fundamentals. He scored +46% and +5%, respectively for the statements, “stands up for beliefs” and “tough to handle a crisis”. In my opinion, these two factors may be important enough to offset some of the other “softer” factors where Trump rates poorly.
Trump’s Advantage: The Economy
In economic fundamentals, Trump has been polling ahead of Democrats in Congress on the most critical issues likely to influence the outcome of the election, including his handling of the economy, jobs and national security. In these areas, Trump was ahead by +12%, +10% and +5%, respectively, according to a Politico/Morning Consult poll as of Apr.5-7, 2019. Of all the fundamentals that are important factors in the election, economic fundamentals will be the most critical to monitor. If the economy continues to expand and the unemployment rate remains low, then Trump’s reelection prospects improve.
US Presidential Elections: Four Scenarios
We can see four potential scenarios in the 2020 US Presidential Elections
US Presidential Agendas
Source: Amundi Pioneer, as of April 2019
Potential Economic Implications
Source: Amundi Pioneer, as of April 2019
Under a reelected Trump, we believe there is greater likelihood of easier fiscal policy via lower taxes and an increase in infrastructure expenditures which, in combination, should propel US economic activity further above trend. Partly offsetting this boost to growth will be the administration’s continued protectionist policies, rising interest rates and a strong US dollar. Robust economic activity would put upward pressure on inflation and wages, potentially prompting the Fed to resume its tightening cycle.
Moderate fiscal stimulus, lower and permanent taxes and a reduction in trade tensions could support trend economic growth. The tightening labor market could add to moderate wage pressures. The Fed may need to fine tune monetary policy, especially if wages rise.
In this scenario, softer growth has led to reelection of Democratic candidate. In this case, modest fiscal stimulus, a weaker US dollar and removal of tariffs could help boost GDP growth. The soft growth could keep inflation in check, while drug price controls could pull prices lower. The Fed would likely maintain a neutral monetary policy.
Under this scenario, a US recession results in the election of a populist Democrat. A populist Democratic administration is more likely than not to maintain many of Trump’s protectionist tendencies. A populist agenda could lead to much easier fiscal policy aimed at stimulating the economy. The recession would dampen inflation, but a likely weaker US dollar, along with implementation of a carbon tax and tariffs, raise stagflation concerns. Finally, the Fed might initially lower rates in response to the recession, but rising inflationary pressures could force the Fed to hike.
Financial Market Implications
Source: Amundi Pioneer, as of April 2019
The equity markets benefit from a strong economy, higher corporate earnings and lower taxes. The infrastructure and defense sectors are potential winners in this environment. Interest rates would rise due to strong growth and rising inflation, keeping the Fed on tightening cycle. The resumption of the Fed’s tightening cycle would keep global interest rate differentials in favor of a strong US dollar.
GOP Nominee Wins
Healthy growth, permanent tax cuts, capital gains indexing and reduced trade tensions could support equity prices. A neutral Fed policy would likely keep interest rates consolidated in a wide range. While stable interest rate differentials mean a stable US dollar, the US dollar is more likely to be influenced by developments overseas.
Establishment Democrat Wins
In this scenario, it is assumed a Democratic president takes over in a weak economy. The stock market would likely be largely stable, but experience a cyclical rebound as growth improves. The tech, pharmaceutical and healthcare sectors could underperform due to Democratic reforms The global convergence in growth and monetary policy drive the US dollar lower.
Populist Democrat Wins
This scenario assumes the economy is in a recession. Below-trend growth and an aggressive populist Democratic agenda lead to a negative environment for equities. In particular, tech, pharmaceutical, defense and healthcare sectors underperform, while construction and resource stocks outperform. Interest rates could rally as the Fed eases policy, but if concerns about stagflation emerge the yield curve may steepen as long rates rise. The negative outlook on US asset prices and narrowing interest rate differentials could lead to depreciation in the US dollar.
Key Determinants for the 2020 Presidential Elections
Financial Market Implications
Financial markets are already reacting to the start of the 2020 Presidential election campaigns.The market perception of an early edge by the Democrats is leading to the pricing in of some key populist Democratic policies, most notably the Medicare-for-All proposal. This has led to a severe underperformance of the Healthcare sector, which had a year-to-date total return of -0.14% as of April 22, well below the 16.7% gain of the S&P 500 Index. Industrials have outperformed the S&P 500 year-to-date, while the Materials sector has lagged. The potential exists for materials to rally on expectations of an infrastructure program.
The Presidential election is still 21 months away, but the battle has already begun. The Democratic field has 20 candidates and counting, the largest field in recent memory, and the campaigning and fundraising is well underway.
At this time, I believe the GOP’s probability of holding on to the Presidency is 50/50 – better odds than current polls and market expectations. There remains a constant tug and pull dynamic in this race that will ultimately determine the outcome and why Trump’s chances remain even. The positive ratings on the economy remain the consistent pull, while voters disappointed in his personal flaws represent the tug. At this juncture, it is too early to know how close we are to the line. Our base case scenario envisions Trump running against an establishment Democrat. Under this scenario, the economy should continue to grow at or above trend. However, there could be a divergence in financial market performance, with equities and the USD performing better under a reelected Trump, while interest rates underperform.
Unless otherwise stated, all information contained in this document is from Amundi Pioneer Asset Management and is as of 31 April 2019.
The views expressed regarding market, economic and political trends are those of the author or third-party sources identified in the article, and not necessarily Amundi Pioneer Asset Management, and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Pioneer Asset Management product. There is no guarantee that market forecasts discussed will be realized or that these trends will continue. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services.
Tobacco Settlement Bonds provide substantial state funding for important public health initiatives aimed at addressing problems related to smoking. This includes reimbursement to states for smoking-related public health costs, anti-smoking campaigns, funding for research to combat tobacco-related diseases, and educational programs, particularly to reduce youth smoking.
Election results are broadly in line with what opinion polls had indicated, although with a slight "pro-institution" surprise. The two historic mainstream parties can build a majority through a coalition either with the liberal center, or with the Greens: it will be a bit more difficult than it used to be, yet it should still be manageable.
Electoral results broadly confirmed our central scenario of a divided Congress, with Democrats winning the House and the GOP reaffirming its control in the Senate. We believe there are two paths that could emerge between the Democratic leadership in the House and Trump. Read our views on those two paths and the possible market reaction and investment implications in our latest perspective.
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