Trump: When you do testing to that extent, you’re going to find more people. You’re going to find more cases. So I said to my people slow the testing down please. pic.twitter.com/RalPJeVH0F
Early days but how is Trump going to turn it around as the virus second wave sweeps his own states?
Morgan Stanley says a Biden Administration is bullish:
US Election: The Art of the Plausible
First, a policy lesson from recent history. Ahead of the 2016 election, the conventional wisdom held that a Trump victory would be a risk-off event. The key mistake was conflating the outcome of the presidential race with overall government policy. The election resulted in a Republican sweep, but their plausible policy path for governing was limited by what they could deliver. That included tax cuts and deregulation, but not the spending cuts and healthcare repeal they also promised. This added up to an economically supportive fiscal expansion, and it only took hours for the markets to put two and two together.
In this election cycle, we see investors making similar mistakes, focusing on the candidates’ provocative positions and overlooking the plausible policy paths. We differ from consensus in three key areas:
We expect more fiscal stimulus even though it’s an election year. We continue to get pushback on our view that Congress will deliver follow-up stimulus to the recent CARES Act this summer. Some believe it is in the Democrats’ interest to deny Republicans the electoral benefit of a strong economy. We disagree. First, there’s only weak evidence that a strong economy guarantees reelection of the incumbent. Second, government assistance in times of crisis is core to the Democrats’ policy brand. Third, though fiscal expansion is rare in a divided government, it is common in reaction to a recession. While growth has turned positive, high unemployment is likely influencing the political calculus. Hence, we think the parties’ areas of agreement could add up to a US$1 trillion package.
A Democratic win doesn’t have to be ‘risk off’. Investors responding to our election survey seem most concerned with a situation where Democrats take back both the Senate and the White House, clearing a path for Biden’s proposals of more than US$3 trillion in new taxes and tighter regulation. However, we think that fails to consider what is practically achievable. First, enacting these proposals would likely require the end of the filibuster – a strong possibility, but a major assumption. Second, Democrats likely have much more scope to spend than to raise taxes. In a sweep, Senate control will come via key wins by moderates, who are less likely to support an array of tax hikes. However, limited tax increases may not keep Democrats from their spending ambitions. Our AlphaWise Battleground States survey shows that Democratic voters are keen on healthcare spending, with moderate-to-liberal voters overwhelmingly supporting the effort even if it means expanding the deficit. Hence, investors may be too focused on the tax side of the equation, overlooking the support for aggregate economic demand from fiscal expansion.
Don’t overreact to China tensions. We’ve recently heard investor concerns that the current US administration will re-escalate tariffs to boost its election prospects. We’re more inclined to see the election as a reason why the US will not take this path. Our survey shows that voters are skeptical about China’s role in the global arena, but more concerned about the domestic economy. Since polls suggest that, on net, voters favor President Trump on the economy, the administration likely views a V-shaped recovery as essential to reelection. Hence, heightened rhetoric and fresh non-tariff actions may be in the cards, but we think that tensions will likely stop short of tariff re-escalation.
Hence, election outcomes remain uncertain, but we think their influence on current policy choices and future policy paths is supportive of risk assets today [ZH translation: no matter who the president is, they won’t allow stocks to drop].
More fiscal expansion this year bolsters our economists’ call for a V-shaped recovery, and further fiscal support in a range of election scenarios could pave the way for sustained economic recovery. While this poses a challenge to US Treasury duration, we think it helps to extend recent gains in US equities and US credit. At the equity sector level, we highlight the potential for financials – an out-of-consensus favorite of our equity strategists – to outperform. They expect value stock outperformance and see positive exposure to a steeper yield curve from fiscal expansion, factors that we think would endure in a variety of November outcomes.
The prospect of $3tr in tax hikes straight out of the stock market and wealthy is not bullish in the short term. Sorry.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
