October 6, 2020
2020 Election Update
As the 2020 presidential and congressional elections come squarely into view, we offer our perspective on how best to navigate a likely period of intense news flow, market volatility, and at least some degree of uncertainty in the investment landscape. In this article, I will cover the state of the race – what we might glean from the polls and other sources and also discuss potential policy implications in the event of a change in leadership.
Polls Favor Biden
As it stands, Joe Biden is leading in national polls. There are actually several national polls conducted by different organizations. We detail individual polls and an average compiled by Real Clear Politics in the table below. As of this writing, Joe Biden is leading in the national polls by an average of seven points ranging from +1 on the low end to +10 on the high end in individual polls. Biden’s lead may appear significant, but polls don’t always tell the whole story.
Source: Real Clear Politics
Four years ago, national polls favored Hillary Clinton over Donald Trump, yet she failed to win the election. She led national polls by an average of four points and won the popular vote by more than two points, but couldn’t come up with the electoral votes she needed to win. In June 2016, the infamous Brexit vote surprised pollsters as well. In spite of the fact that 67% of polls predicted a “stay” vote, citizens voted 52/48 to “leave.”
Electoral College Dynamics Favor Trump
While Joe Biden leads the polls, state-by-state dynamics of the Electoral College favor Donald Trump for the win. Biden is leading in national polls, which means he is predicted to win the national popular vote, but it gets a little more complicated when we consider the Electoral College. In the United States, each state runs its own popular vote and throws all of a predetermined number of electoral votes to the winning candidate.
Looking at state-by-state polling, some states lean pretty firmly in one direction or the other. Some states are a foregone conclusion for Joe Biden or Donald Trump and some can be considered a likely win, or at least leaning in one direction or the other. As it stands, Biden has more electoral votes “secured” or highly likely to fall his way, but a number of states are too close to call and there are more than enough electoral votes up for grabs for either candidate to win.
Source: Real Clear Politics
We say Electoral College dynamics favor Trump because when you do the math, you identify Biden’s challenge. He has to win the national popular vote to win the election and could win by as much as 4% and still lose. If you’re watching coverage on the evening of November 3, you’ll want to pay close attention to Florida and Pennsylvania in particular – the candidate who takes these two swing states probably comes out ahead.
Source: Real Clear Politics
Odds Makers Predict Biden Victory and a Dem Sweep
Betting lines also provide some insight into the race. There are odds making platform that facilitate wagering on political outcomes and the payoffs reflect bettor’s collective expectations. There really shouldn’t be any bias in this information which reflects the opinions of individuals trying to choose the right answer given the prospect for financial gain. Right now, the odds makers align with the polls favoring Biden and also predict a unified democratic government meaning not just a Biden presidency, but also democratic majorities in the House and Senate.
At the end of the day the stakes are high and given the number of wildcards possible between now and November 3, we think this race is simply too close to call.
If We Knew, What Would We Do?
Conventional wisdom suggests Republicans are better for business and better for the markets, but to the to the degree that history matters, it tells us that we probably shouldn’t put too much stock in political outcomes as a market driver. Over the years, we have seen healthy market results under both parties and stronger results with a unified government favoring either party than with a blended government.
Source: Bloomberg and Greenleaf Trust Calculations
In recent months, we’ve had clients voice concerns over a Biden presidency and more importantly the implications of a democratic sweep – they want to abandon discipline, get conservative or “go to cash” and presumably reinvest when their preferred party regains control. We ran three hypothetical portfolios to evaluate this concept. We created the Democratic portfolio – fully invested during a Democratic sweep, uninvested during a Republican sweep and 50% invested when government is blended. We created the inverse for Republicans and we also created a non-partisan portfolio that practices discipline and stays invested.
Over 75 years, $1 invested in the Democratic portfolio grows to $170 and $1 invested in the Republican portfolio grows to $28, while the same dollar grows to more than $3,000 in the non-partisan portfolio.
Even recently, selling stocks when either President Obama or President Trump was elected because of political concerns would have been a big mistake in hindsight. This is why we advise our clients to vote with their ballots and not with their portfolios.
A Challenging Landscape for Either Candidate
Either candidate will face a challenging set of circumstances as president of the United States. We’re in the middle of a global pandemic, a public health crisis that has cost hundreds of thousands of lives, and there’s a lack of consensus on how to deal with that. We have made significant economic sacrifices in our attempts to manage the virus – unemployment is excessive and the economy is trying to recover. Lastly, the government has spent trillions of dollars on relief driving the budget deficit and our national debt to record highs. As the incumbent, and in light of these circumstances, Donald Trump is a bit of a known quantity, so we offer our thoughts on potential policy implications in the event of a change in leadership.
Potential Biden Policy Implications
Our discussion will focus on policies that are more likely to impact the economy and the markets, steering clear of social issues. Beginning with some of the tax code changes proposed by Joe Biden, on the corporate side, he’s proposing an increase to 28% from 21%. If that seems like a big jump, remember that the 2017 Tax Cuts and Jobs act reduced the corporate rate from 35% to 21%, so while corporate tax rates could go up under Biden’s proposal, they would still be lower than they were just three years ago. On the individual side, most of Biden’s tax proposals affect the highest earners – if you earn less than $400K per year, you shouldn’t be affected, but he is looking to restore the top bracket rate on individual income to 39.6% from 37.0% currently, which means slightly higher taxes on income up and above $622,500 for households. He also proposes raising the maximum long-term gains rate for those with more than $1 million in income and elimination of basis step up for inherited assets.
Importantly, we think it will be difficult for either candidate to avoid raising taxes somewhere considering where things stand from a deficit and national debt perspective. In fact, 70% of fortune 500 executives are planning on higher taxes following the 2020 election regardless of which candidate wins.
Biden’s proposal for $1.3 trillion in infrastructure spending over the next ten years should create fiscal tailwinds for the economy, but will need to be funded. Regarding trade policy, we believe management teams and the markets might prefer a more predictable approach under Biden who advocates for lower tariffs with major trading partners outside of China and a more diplomatic approach to our trade relations with China.
We take policy proposals touted along the campaign trail with a grain of salt as many get pretty watered down by the time they actually get implemented. And that said, neither candidate’s policies or proposed policies tilt to such an extreme one way or the other that we would lose sleep over them from a market or economic perspective. There is one thing that concerns us though…
The Biggest Risk
We believe the biggest near-term risk with the 2020 election is not one outcome or the other, but no outcome at all. The stakes are high and election logistics are complicated by COVID-19, mail-in ballots and state-specific regulations. Markets don’t like uncertainty and the election itself represents an uncertainty. Knowing the outcome would be a positive, while not-knowing would mean more uncertainty.
To the extent the election is close, the country could be in for an extended period of contentious debate and litigation. We got a taste of this 20 years ago when a close race in Florida left the election undecided for over a month. If markets don’t like uncertainty, they do like stable political institutions supporting reliable legal frameworks that lend confidence in investment and ownership. Hopefully this is a non-issue, but in the event of a Biden victory, an orderly transition of power will be critical and in the event of a Trump victory, legitimizing the outcome via democratic concession will be equally critical.
Conclusion
The rest of 2020 could get pretty interesting. The next four years could get pretty interesting, but your investment objectives have a longer life than politicians and election cycles. Politics make us passionate and that’s a good thing—it keeps us engaged in the national conversation and that’s what makes a democracy work. Unfortunately, strong political views have the potential to interfere with sound investment decisions. We focus on maximizing after-tax, after-fee returns for a given level of risk. In spite of a changing landscape, we believe clients will continue to benefit from globally diversified equity strategies and look to our active managers to make thoughtful security-specific decisions in light of policy changes. We expect interest rates to remain lower for longer, which informs our allocation decisions at the portfolio level and within our fixed income strategies. Any adjustments we happen to make in the coming months will be consistent with our longer-term outlook and documented investment philosophy. The short-term market experience is always unpredictable, but we build portfolios for the long-term.