What impact will the election have on the markets?

2020 Election

Investing and politics

Market Update

The S&P 500 dropped 1% last week to 3295.47. It was the biggest one-week drop since August. It was also only the second down week in the last 15 weeks for the S&P. Fifteen weeks takes us back to October 4th, just before the Fed announced the Treasury Bill buying program.

Thursday was the only up day. Friday’s trading range was over 1%. These days that qualifies for a volatile market. “The S&P 500 has gone 71 days without a 1% move in either direction,” according to Barron’s. It’s the longest such streak in 15 months. Volatility might pick up over the next few weeks if the Coronavirus gains traction. Investors might decide the virus could impact economic activity.

Of course, we may get a pickup in volatility and more downside action even if the Coronavirus quickly fades from the headlines. The Federal Reserve has expanded its balance sheet by over $300 billion since September. The U.S. stock market has added $3 trillion in value during the same period. The Fed is buying $60 billion monthly in Treasury bills. It says it is providing liquidity to the overnight repurchase market. Recall that overnight rates spiked in September several times, causing a disruption in overnight lending markets. The Treasury bill buying is effectively Quantitative Easing (QE). It provides additional funds for speculators to speculate. However, the latest data from the Federal Reserve shows that the central bank’s balance sheet has stopped expanding since the start of the year. Interestingly, it shrunk by $25 billion in the week ending last Wednesday. Perhaps the suddenly contracting Fed balance sheet is a better explanation for recent market weakness than the Coronavirus.

Election 2020

Recently, one of the questions I’ve gotten most often is about the coming 2020 election. “What impact will the election have on the markets?” Almost every conversation I have with anyone about investing now includes that question. The short answer is no one really knows. We can make some educated guesses but that’s all they are, guesses. Far more important to market performance over the long run is economic performance, corporate earnings, and interest rates. Who wins the Presidency might lead to some short-term volatility. It’s unlikely to have a lasting impact unless the winner implements major changes in fiscal policy and long-term changes to the regulatory environment. Both are unlikely regardless of who wins.

Fiscal Policy and long-term changes in regulatory enforcement can certainly impact capital markets over the long term. But it’s impossible to untangle the many interacting effects except in the broadest of terms. We know for instance that increased savings lead to increased business investment.  In turn, increased business investment leads to increases in productivity. Increases in productivity lead to increases in living standards. We also know that increases in the labor force lead to increases in real GDP growth assuming productivity doesn’t decline. Allowing more skilled labor into our country increases real GDP growth. There are currently some 7.6 million unfilled skilled positions in the United States, according to the Department of Labor (DOL). There are only 6.5 million people looking for work. Investment in infrastructure is one certain means of increasing real GDP growth. You can’t ramp up infrastructure spending without skilled labor. An existing labor shortage doesn’t bode well for upgrading our highways, bridges, and airports.

Regulation is another area that can impact long-term economic growth, but executive orders aren’t a long-term solution. Congress passes laws and the President is charged with enforcing them. The President can’t make legislation which means the President can’t make lasting policy changes. A Democratic President exits, and the Republican successor unwinds the executive orders implemented by the prior President. A Republican President exits, and the Democratic successor unwinds the executive orders implemented by his predecessor. Eight (or four) years at a time is no way to run a country.

What impact will the 2020 election have on the stock market this year? My best guess is it ends up as nothing more than a bump in the road. A very smart friend of mine told me a long time ago that “Presidents get too much credit for the economy and also too much blame for the economy.” Twenty-seven years and seven Presidential elections later I agree.

Regards,

Christopher R Norwood, CFA

Chief Market Strategist