Former Vice President Joe Biden and Senator Bernie Sanders bumped elbows as they took the stage on 15 March for what may turn out to be the final Democratic debate of the current campaign. They stood six feet apart in an act of social distancing and promptly engaged in a substantive debate, without the distraction of a live audience eager to applaud the candidates’ prepared soundbites. The coronavirus pandemic gripping the globe has altered expectations about many things, and the presidential campaign has not been spared. An amicable argument between two septuagenarians in an empty television studio was just one of the exceptional images to emerge during the past few weeks.
Biden set to win the Democratic nomination
Biden won primary elections in three states holding primaries on 17 March. In doing so, he opened up a nearly insurmountable lead in committed delegates and became the presumptive Democratic nominee. Senator Sanders tacitly acknowledged that the race might be over when he announced he was reassessing the future of his campaign. President Trump and the former vice president are each over the age of 70, which makes them more susceptible to serious complications if they contract the coronavirus.
Candidates have abandoned the usual practice of shaking hands and holding rallies with supporters, relying instead on social media to generate popular support. The Biden campaign launched its “New York Virtual Campaign” on 17 March, which presumably heralds more online appearances. Even President Trump has been forced to abandon his rallies in favor of somber appearances before the White House press corps to discuss the government’s response to the pandemic. In this environment, the incumbent has an important advantage in terms of exposure. Crisis management forces the national media to provide his administration with ample media coverage. Of course, the voters’ perception of the president’s handling of the situation will ultimately decide if this aids or detracts from his reelection chances.
COVID-19 clouds the picture
Biden’s expected defeat of Sanders is certainly a positive development for financial markets. But while election uncertainty has been curbed in the near term, extreme market volatility has overshadowed the clarity provided by the 17 March slate of primaries. The global COVID-19 pandemic has undermined market confidence and triggered both a bear market in equities and a liquidity crisis in fixed income markets. The chaotic market action is due to a variety of factors but the overriding consideration has been uncertainty over the depth of the coming economic recession. Unlike the financial crisis of 2008–09, which was prompted by inflated asset values and excessive leverage, the current crisis is easier to understand for many Americans. When you are asked to shelter in place and avoid personal interactions with friends and neighbors, the signal is clear. The world has really changed.
In our central case scenario, new cases of COVID-19 peak by mid-April, allowing the most severe restrictions on social interaction to be lifted in mid-May. If the virus proves hard to eradicate, some restrictions may need to be reimposed intermittently in some countries for the remainder of the year. In this scenario, we believe that a coordinated monetary and fiscal response can provide the necessary funding to backstop affected businesses and industries, but it arrives too late to protect all. We would therefore expect a “U-shaped” economic recovery to unfold and gain traction during the fourth quarter of 2020.
UBS conducted an Investor Watch Pulse survey earlier this month and found that investors’ outlook on the economy had already deteriorated significantly. Only 39% had an optimistic outlook for the next 12 months, down from more than two-thirds just two months earlier. Nearly half of investors were pessimistic, and were clearly prescient in their assessment.
Investors have responded to the abrupt increase in volatility by adopting a risk-off strategy. Equities plummeted and credit risk was jettisoned in favor of cash positions and ultra-safe short-term Treasury securities. Even municipal bonds, which heretofore have enjoyed a reputation as a safe and familiar haven in times of market dislocations, were not spared. The current market sell-off reminds us of the importance of building robust portfolios that can meet liquidity needs during recessions and times of extreme market volatility.
Fortunately, Congress has approved a raft of initiatives to protect small businesses and their employees from financial ruin. Small business loans and stipends to individual taxpayers for basic necessities are just the first steps. The Department of Housing and Urban Development will suspend all foreclosures and evictions until at least the end of April. The US Treasury extended the deadline for filing federal income taxes from 15 April to 15 July, with most states expected to follow suit. The Treasury is also seeking Congressional authorization to provide the airline industry with a secured lending facility. The president has invoked the Defense Production Act, which gives him the authority to require private sector companies to produce products essential to national security. The list of new initiatives is lengthy…and necessary.
Optimism about US economy down from January...
...but long-term outlook still strong
The road ahead
The coronavirus has introduced a novel set of circumstances for a US presidential election. The remaining primary elections will be held in an atmosphere of uncertainty and anxiety. Look no further than Ohio, where Governor Mike DeWine declared a health emergency and shuttered polling stations shortly before they were scheduled to open. He did so over the objections of the Democratic National Committee, which urged states to hold elections but also to take necessary precautions. Eight other states (and counting) have also opted to postpone their primaries in an effort to reduce the risks associated with congested polling stations.
We expect state governments to ease restrictions on absentee voting in the wake of the current pandemic and to investigate the feasibility of using the US Postal Service to deliver ballots for the general election. Two-thirds of the states already permit absentee voting by mail, although some require an excuse to do so. Six states have already converted their systems to tabulate all votes by mail. We expect more to follow. Meanwhile, the Wyoming Democratic Party canceled its caucus scheduled to occur on 4 April. Instead, registered party members will retrieve and deposit their ballots at specified locations. Caucuses are becoming increasingly rare and Iowa’s botched effort earlier this year only accelerated the rate at which they are abandoned in favor of conventional elections. The current pandemic will only hasten their demise.
The US has experienced 11 economic recessions since 1945 with an average duration of 11 months.1 Recessions always pose a challenge for incumbents seeking reelection but they are not always disqualifying. Voters do, on occasion, return an incumbent to office despite a contraction in economic activity. President Trump faces the additional impediment of having boasted about the vigor of the US economy in recent years. However, serving as the chief executive in a time of crisis could present an opportunity to bolster his election chances due to the numerous opportunities to communicate directly with American voters. Former Vice President Biden, by contrast, is denied the opportunity to speak before large gatherings and must find alternative means of conveying his policy platform.
According to a recent survey by the Pew Research Center, two-thirds of Americans already feel “worn out” by the incessant barrage of news through conventional and social media channels. The fatigue is shared by journalists, who have voiced their own frustration with the unrelenting stream of news stories.2 Fortunately, despite the apparent exhaustion, more than 60% of both Democrats and Republicans say they are following the campaigns closely. That alone is evidence of the importance that Americans are assigning to the upcoming election.
Policies still matter
While COVID-19 may be clouding the near-term picture, it is still important to assess the potential market impact of this election. The elected president will look to shape the policy environment for at least the next four years, and many of those policies will extend beyond the measures being taken by Washington to curb the immediate virus impact.
With this in mind, we examine President Trump’s and former Vice President Biden’s policy agendas across seven key areas, and assess their potential market impact. We also analyze the likelihood of enactment. Control of the US Senate may depend upon the outcome of the presidential election. To the extent that Donald Trump is reelected, the probability of the GOP retaining its majority is higher. If Biden is elected, the odds of a Democratic Senate increase markedly. Republican control of the House is far less likely regardless of who wins the presidential election.