Markets Will Focus On Elections In The Divided States Of America
Summary
- A political, social, and economic mess paves the way for election day.
- Three economic issues that investors should be aware of regarding the election are 1) Regulation, 2) Taxes, and 3) Energy. The campaigning will ramp up shortly.
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In November, the incumbent President will face former Vice President Joe Biden in a contest that could be even more contentious than four years ago. The US is politically divided. Coronavirus has wreaked havoc with the US and global economies. Over forty-million people lost their jobs since March, and the US economy is contracting. US and Chinese relations have deteriorated. Meanwhile, the stock market recovered from its initial move lower in March, as the economy begins to awaken from a self-induced coma. The NASDAQ made a new record high on Friday.
There is a lot at stake in the 2020 Presidential contest for the US and the rest of the world. The nation will decide if the status quo over the past three and one-half years will remain the course until 2024 or if there will be a dramatic policy shift. Markets reflect the political and economic landscapes. As the election nears, we could see volatility in markets across all asset classes increase.
The events over the first five months of 2020 caused a reaction in markets that brings back memories of 2008. With the economy on the verge of a depression, the Fed and government have injected unprecedented levels of liquidity into the financial system. The 2008 financial crisis led to a period when commodity prices rose to multi-year or all-time highs after a deflationary spiral in 2008. By 2011, the impact of liquidity took raw material prices to highs. In 2020, the amount of stimulus is far higher than a dozen years ago. The Invesco DB Commodity Index Tracking Fund (DBC) holds a portfolio of commodities futures contracts. The election and path of the US when it comes to regulation, taxes, and energy production could exacerbate inflationary pressures over the coming month and into 2021. These issues are likely to be the focus of the upcoming contest.
A political, social, and economic mess paves the way for election day
Most market participants were optimistic at the beginning of 2020. In the US, unemployment was at its lowest level since the 1960s, GDP was growing at a moderate pace, and the stock market was making record highs on almost a daily basis. The trade war that had created uncertainty in 2018 and 2019 deescalated, as China and the US signed a “phase one” deal in Washington on January 15. Both sides said that the first agreement would pave the way for a more comprehensive protocol over the coming months.
In the UK, the overwhelming victory by Prime Minister Boris Johnson paved the way for Brexit with a deal between the UK and the EU. The potential of a hard Brexit that would create challenges disappeared.
The outbreak of Coronavirus and its spread across the globe created a self-induced coma that brought significant sectors of the economy to its knees. As the number of cases and fatalities rose in Europe, the US, and other parts of the world, social distancing guidelines caused people to shelter-in-place. The impact on businesses, tax revenues, and individuals have been unprecedented. In the US, over forty million people lost jobs since March. The full effect will begin to emerge over the coming weeks and months as economic data will reveal the carnage.
Central banks and governments unleashed a tidal wave of monetary and fiscal stimulus packages far higher than during the 2008 financial crisis. The health and economic crisis will likely cause a continuation of stimulus to stabilize markets over the coming months.
2020 has been challenging from many perspectives. Meanwhile, stocks and many other asset markets have recovered. The stimulus and rising optimism that the worst of the pandemic has passed took the market higher since the March low. However, the rising in the stock market could be a mixed blessing as it reveals and exacerbates the vast gulf between the wealthy and those struggling on a day-to-day basis in the United States. With all of these issues, Americans are divided along political lines. President Trump has been a polarizing figure since the 2016 election. Supporters believe he is delivering on promises, while opponents feel he is destroying the world’s leading nation.
The state of the union in the US is a mess at the beginning of June. The situation has made the nation the Divided States of America.
Campaigning On Key Economic Issues Will Ramp-Up This Summer
The debates, speeches, and campaigning will create a frenzy of activity starting this summer. As of June 5, the polls show that the former Vice President enjoys a lead in the race. However, Secretary Clinton held the lead until election day, and she lost the contest in 2016. Until people cast their votes, nothing is for sure, which could create another period where uncertainty grips markets. Financial and commodity markets reflect the political and economic landscapes. The two candidates have very different ideas when it comes to policy initiatives starting in early 2021. The path of least resistance of asset prices will be at least partially a function of the election results. However, the price tag of the stimulus could be the most significant factor facing the Oval Office’s occupant in the coming years.
When it comes to policy initiatives, markets are likely to focus on three issues. However, success when it comes to policy depends not only on the winner of the Presidency but on which party holds a majority in the House of Representatives and the Senate. Without all three, gridlock will likely continue to prevail.
Issue one- Regulation
President Trump and the Republicans dramatically reduced regulations over the past years. The size of government shrunk from the previous administration. If re-elected, the trend is likely to continue.
The regulatory environment could return to levels seen during the Obama administration is Joe Biden wins the election. The progressive movement that is shifting the Democrat’s platform to the left may even expand regulations. One of the central policy initiatives of Democrats is likely to be the “Green New Deal.” Climate change is an issue that divides political parties. A victory by the opposition party with majorities in the House and Senate and the executive branch would likely cause sweeping reform complete with a host of new regulations for the environment and most other sectors.
Issue two- Taxes
President Trump slashed corporate and individual taxes during his first term. Joe Biden has pledged to raise taxes on corporations, and many individuals. The tax cuts fueled the rise in the stock market over the past years.
Whoever wins the election will face rising deficits, states that are on the verge of bankruptcy, and a monumental price tag for the stimulus, bailouts, and helicopter money showered on the economy because of the global pandemic.
Taxes in the United States are likely to rise regardless of the election results. The odds favor far higher levels in a Biden administration if it has the support of the House and Senate. Moreover, the civil unrest will give way to a discussion about new social programs in the US on the state and federal levels. Funding those programs will require more tax revenue. During the debates, progressive candidate Bernie Sanders said that there should be no billionaires in the United States. The poor showing of Michael Bloomberg in the primaries validated an overwhelming approval of Sander’s views.
Unemployment in the US is likely to remain high over the coming months and years as companies learn to do more with less in the aftermath of the pandemic.
Rising taxes on corporations and individuals could temper the upside potential for the stock market over the coming years. At the same time, the rise in share prices exacerbates the division of wealth in the United States. Together with racism, the divide is a social issue that could cause significant wealth and inheritance taxes supported by progressive Democrats over the coming years. As those funds go into government coffers, they will not find their way into the stock market and other investment vehicles.
Meanwhile, another four years of a Trump administration could also see rising taxes. Smaller government, fewer regulations, and less funding for social programs than the Democrats favor would likely make tax increases less under the Republicans.
Both parties favor a rebuilding initiative in the US to address the crumbling infrastructure. With job losses at the highest level since the 1930s, a program could be the answer for employment for many individuals displaced because of the pandemic. However, any type of government works and infrastructure package would require agreement between the legislative and executive branches in 2021 and beyond.
Issues three- Energy
President Trump believes that energy independence is critical for the national security of the United States. Over the past years, the US became the leading producer of crude oil and natural gas. Technological advances, fewer regulations, favorable tax policy all encouraged output of fossil fuels. Another four years in the White House for the sitting President would keep the US on the same track. While production has declined with the price of energy commodities, the US remains a leading force in the production of hydrocarbons and a swing producer. Energy output will rise and fall with prices in a second Trump administration.
The “Green New Deal” would address climate change by reducing the carbon footprint in the US. Many progressives are more than passionate about the cause. A Biden victory would cause the US to rejoin the global climate accord while putting significant roadblocks in front of US producers. Fracking could be banned in many parts of the country, and the national agenda would likely shift to alternative fuel sources that reduce or eliminate hydrocarbons. The action in energy-related stocks over the past years is a sign that the market expects a significant change in energy policy over the coming years. Democrats would like to see oil and gas join coal on the scrap head of energy sources that power the US.
The three issues are only a few of the contentious topics that will be addressed by the candidates over the coming months. Vice President Biden took his last oath of office in early 2009, in the aftermath of the 2008 financial crisis. Whichever candidate becomes President in early 2021 will face the price tag for 2020, the most expensive year in history for the US and most nations around the globe. Business activity ground to a halt, causing tax flows to decline dramatically. At the same time, massive amounts of stimulus have increased debt and weigh on the purchasing power of all fiat currencies.
During their first term, President Obama and Vice President Biden watched as commodity prices rose to multi-year, and in some cases, all-time highs in 2011 and 2012. The move was at least partially a result of the liquidity that stabilized markets in 2008 and the years that followed. If history repeats, as it often does, the coming years could bring an even more aggressive rally in the commodities asset class. In May, the US Treasury borrowed over five times the level in 2008 to fund the stimulus. That borrowing is likely to rise as the government debates additional programs.
Inflation eats away at the purchasing power of currencies. The economic condition can grip the financial system during periods of economic expansion or contraction. Stagflation is particularly challenging as prices rise during periods when unemployment is at high levels.
There is little chance that the US or European central banks will increase interest rates any time soon. The massive liquidity could be the fuel that ignites the prices of commodities, which are essential products for individuals and companies worldwide. I expect that commodities will experience a rally that takes them even higher than in 2011, creating new challenges for the US in the coming years.
One broad way for investors to capitalize on rising commodity prices is by investing in the Invesco DB Commodity Index Tracking Fund (DBC) holds a portfolio of commodity futures contracts. The fund summary and most recent top holdings include:
Source: Yahoo Finance
DBC holds a diversified portfolio that includes metals, energy, and agricultural commodities. In 2011, all of these products rose to multiyear highs. DBC has net assets of $818.32 million, trades an average of around 1.59 million contracts each day, and charges a 0.85% expense ratio.
Source: Barchart
The chart shows that from 2008 to 2011, DBC rose from $17.94 to $32.02 per share or 78.5%. At the $12.31 level at the end of last week, DBC was just over the low of $10.41 from March 2020.
The Presidential election could determine the US’s future policies, which is still the world’s leading economy. A tidal wave of stimulus will present a unique challenge for the winner of the contest as it could spark a wave of inflationary pressures not seen since the 1970s.
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This article was written by
Andrew Hecht is a 35-year Wall Street veteran covering commodities and precious metals.
He runs the investing group The Hecht Commodity Report, one of the most comprehensive commodities services available. It covers the market movements of 20 different commodities and provides bullish, bearish and neutral calls; directional trading recommendations, and actionable ideas for traders. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The author always has positions in commodities markets in futures, options, ETF/ETN products, and commodity equities. These long and short positions tend to change on an intraday basis.
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Comments (25)
The election will be viewed as a referendum on President Trump's leadership or lack thereof.Happy Trails...
