The 2020 election represents our sixth presidential election advising clients. Many voters felt that each of these elections reflected the increasing polarization of America and represented a “do-or-die” battle for the soul and future of our country. That emotional intensity makes objective, policy-based discussions about elections difficult; however, such discussions are critical in a well-functioning democracy. So, rather than shy from the inherent challenges of navigating political conversation, we recognize the importance of engaging such conversation thoughtfully, independently, and with great humility.
In each election, we have been asked to predict the impact of the election on the economy and markets. Rather than making predictions, however, we find it more useful to identify the key themes likely to shape the election and in turn be shaped by its outcome.
“The Economy, Stupid”
In 1992, James Carville, campaign director for presidential candidate, Bill Clinton, made the economy a central tenet of Clinton’s campaign.1 It was an interesting move given that the US economy was fine in 1992, having emerged from an 18-month recession in 2Q 1991.2 While many factors contributed to Clinton’s victory that November, creating dissonance in the minds of voters about an otherwise reasonably robust economy certainly played a role.
More recently, the 2008 presidential election between Senator John McCain and Senator Barack Obama was extremely tight when foreign policy dominated the discussions. With the US fighting wars in Iraq and Afghanistan, McCain’s military and foreign policy experience seemed attractive to many in early polling. However, with Bear Stearns failing in May 2008, then Lehman Brothers kicking off a series of financial institution collapses that September, the crisis pivoted from the Middle East and Central Asia back to our own neighborhoods. Suddenly, the stability of our very financial system became the primary focus for many voters. Media coverage of McCain shifted from net positive to very strongly net negative over just five weeks, reflecting his campaign’s difficulty pivoting to project confident leadership in an economic crisis.3
While November is a few months away, voters are extremely concerned about which candidate can best repair the pandemic-seared economy and grow that economy going forward. President Trump ran in 2016 on a promise to boost economic growth, improve corporate earnings, rewrite trade agreements, and reduce unemployment, among other items. Through February 2020, he made significant progress on all four items, something he likely will highlight as evidence of his ability to get the economy restarted in a post-COVID world. Meanwhile, he also has presided over the single worst quarter of economic growth since records began in 1945,4 something on which Former Vice President Biden will focus. Biden also has been reminding voters that he was part of the administration that oversaw America’s recovery from the Great Financial Crisis, though that recovery is not universally viewed as a strong one.
Policy, Policy, Policy
While many people tend to vote more on emotions and other psychosocial factors, we expect that policy differences on taxes, trade, regulation, and energy policy will continue to distinguish the candidates, though not always in ways that are predictable. For example, President Trump—representing the party generally associated with free trade and unfettered capitalism—campaigned on opposition to both the North American Free Trade Agreement (NAFTA), a President Clinton-led trade agreement between the US, Canada, and Mexico, and the Trans-Pacific Partnership (TPP), a President Obama-led proposed trade agreement between the US and several Asian nations.5 While the Democrats had positioned themselves since the 1920s as the party of the “working class,” Trump used opposition to these trade deals to build resonance with historically Democratic voters. Up until COVID, trade continued to be one of the most significant policy issues moving markets, affecting the economy, and energizing many voters in historically Democratic strongholds.
Regulation in general and energy policy specifically will influence some voters; however, the impact on markets is less clear. Many expected that President Trump’s promised deregulation of the energy sector would make it a good investment opportunity. Naming ExxonMobil CEO, Rex Tillerson, as Secretary of State, seemed to underscore the opportunity for big energy. However, on inauguration day (January 20, 2017), Exxon traded at 85.89 per share. Three years later, on January 31, 2020, and prior to COVID becoming a global pandemic, Exxon closed at 62.12, a decline of 28%. It closed on August 13 at 43.01. Thus, for all of the real and anticipated policy support, one of the largest oil and gas producers in the world saw its stock price fall by 50% in the President’s first term. During the same period, the Standard & Poor’s 500 increased by 49%.6 Thus, despite a President and Senate favorable to the industry, forces outside the control of elected leaders—namely, supply and demand—have proven more influential. Exxon and energy serve as a potent reminder of the risk of using elections to pick sectors or stocks.
Federal Debt
While many of our clients express concern about the Federal debt (and have for two decades), we do not see it as an issue that either party is interested in addressing. Recently, neither party has embraced the role of “fiscal conservative” except in one-off highly partisan issues, and we do not expect that either party will make the hard decisions that would be involved in reducing our debt. Many party leaders and elected officials fear that it would be political suicide to even suggest the need to modify social security or health care benefits, cut defense, or otherwise reduce Federal largess, particularly given the pandemic. Under Presidents Obama and Trump, our debt has grown from $10.7 trillion to $23.2 trillion (through March 31, 2020),7 with the pandemic and Federal interventions very likely to grow that level substantially over the next several quarters.
Inequality
COVID has stripped America’s veneer of economic security and mobility. The disparate impacts of COVID are heavily shaped by access to power and capital. Inequality was a big variable in 2016 and will be an even bigger variable in 2020 as more and more Americans have found their economic security profoundly shaken—if not shattered—by the pandemic.
Throughout American history, our country been redefining who is worthy of being included in the broader American Dream. Despite our myths otherwise, America’s founders could not imagine a land of equal opportunity because that concept was not part of their worldview. By and large, they believed that certain people were inherently more capable, more worthy, more blessed by Providence. THOSE people should have equal opportunity. There has rarely been much sympathy in the US—or in other nations—for people who are the “wrong” economic class, race, religion, gender, nationality, or sexual orientation. While “all men are created equal” made for a compelling opening sentence, the signers of the Declaration of Independence had never meant “all men” the way many define that term today. While radical at the time, they were not building a country meant to provide opportunity for all; even many white men were excluded from their initial vision.
Today, nearly 250 years later, many people in our society feel—and are—marginalized. In 2008, 2012, and 2016, Presidents Obama and Trump tapped into that sense of being excluded from the American Dream. We expect that whoever serves as our next president will have been elected by acknowledging peoples’ grievances and frustrations and promising a path forward that creates greater opportunity. To engage with most voters, candidates likely will focus more on passion than on specific policies. But policies will matter to some, perhaps enough to move the needle one way or the other.
We do not invest for
elections; few experienced investors do. But we care deeply about this country
and our path forward. I hope that we look back on the 2020 election as one that
strengthened the American Dream and expanded who can participate in it.
1. New York Times, “Democrat Fights Perceptions of Bush Gain,” Michael Kelly, October 31, 1992
2. St. Louis Federal Reserve, “Dates of US recessions as inferred by GDP-based recession indicator”
3. Pew Research, “How the Lehman Bros. crisis impacted the 2008 presidential race,” Jesse Holcomb, September 19, 2013
4. The Guardian, “US economy suffers worst quarter since the second world war as GDP shrinks by 32.9%,” Dominic Rushe, July 30, 2020
5. President Obama had tabled TPP in 2009, then resurfaced it toward the end of his presidency. Congressional Democrats did not support TPP over concern that trade was hurting rather than helping American job creation. For the same reason, President Trump opposed TPP strongly through the 2016 campaign, then killed potential US participation in the deal in 2017.
6. Bloomberg
7. St. Louis Federal Reserve, “Federal Debt: Total Public Debt,” January 1, 2009 to March 31, 2020