What impact will the November 2020 Presidential elections have on the financial markets? When will an economic downturn occur? These are two questions that have been at the forefront of investors’ minds. These concerns will likely continue to grow, reaching a crescendo near next year’s election.
While timing remains unclear, we still anticipate an eventual resolution to the trade frictions between the U.S. and China. It appears that both sides want an easing from the current level of tariffs, as it looks like a preliminary agreement is in the works. A more substantive agreement, especially one involving intellectual property protection, will be crucial from a U.S. perspective, as there is no clear path to return the U.S. to ‘manufacturing powerhouse’ status. As such, we anticipate further agreements to be reached as we approach the November 2020 elections.
Changing gears, the Fed has lowered rates three times in 2019 in an attempt to stimulate the slumping economy. President Trump has expressed his displeasure at the high level of rates in the U.S. relative to the rest of the world and has lobbied the Fed to take more aggressive actions on the interest rate front. We do not believe that the economy will enjoy much of a boost strictly from lower rates, as they are already at record low levels. We do think, however, that lower interest rates in the U.S. could help to devalue the dollar, which would help U.S. manufacturers and farmers sell their products abroad. The dollar’s value is currently fairly high relative to many of our trading partners, thereby hurting the competitiveness of domestic exporters.
From an investment perspective, next year’s election will likely carry more weight with investors than any other election in recent U.S. history. It is incredible how many sizable market moves have occurred over the past year based strictly on political tweets, and the election is still more than a year away!
“It’s the economy, stupid,” was a campaign slogan that the Clinton campaign used against George H. W. Bush in the 1992 presidential campaign. That slogan is probably as fitting today as it was back then. Although not robust, current economic conditions favor the incumbent. Putting partisan politics aside, most models that track the economy and election outcomes indicate President Trump is going to be re-elected. We believe that such an event would be viewed favorably by financial markets.
Looking at the Democratic candidates, Biden would likely be viewed the most positively by investors, while the far left-leaning candidates such as Warren, Harris, or Sanders may very well provide the catalyst for a bear market (representing a market decline of 20% or more). We will be closely monitoring these developments. Furthermore, given the importance of next year’s election to the financial markets, we will be publishing a more comprehensive thought piece on this subject later this quarter.
Lastly, it is easy for investors to lose focus and objectivity with the continual onslaught of tweets and news headlines. Social media has fueled these flames, creating an environment where it is easy for investors to lose that objectivity and to act emotionally rather than rationally.