As talks of additional stimulus failed to reach resolution, stocks fell yesterday. Adding to losses in the Dow was the poor reaction to IBM’s# results. While they met expectations on both the top and bottom lines, management did a poor job laying out future directions.
Speaker Pelosi and Secretary Mnuchin continue to talk. There is general agreement that the size of the next stimulus package will be a bit over $1.8 trillion. But there is still some disagreement on the size of each component in the bill. Nonetheless, the two continue talking past Ms. Pelosi’s midnight deadline. Typical Washington. My own expectation is that the two will eventually come to an agreement. Majority Leader Mitch McConnell has agreed to present whatever agreement is reached to the Senate. Ms. Pelosi, of course, will present it to the House, where passage would be highly likely given Democrat control. In the Senate, Republicans will be split. Some of the most conservative Republicans would prefer no bill at all. Few are comfortable at $1.8 trillion. Roughly a dozen Republican votes are needed for passage. Given the timing of negotiations and the need for Senators to spend some amount of time completing to process of approving the appointment of Judge Amy Coney Barrett to the Supreme Court, it becomes increasingly unlikely that the bill will be presented to the Senate floor before Election Day. Mr. McConnell probably prefers deferring the vote anyway, with almost ten Republican Senators involved in tight elections. It is still possible that no agreement will be reached and any further stimulus will have to wait until after the January 20 inauguration.
From a stock market perspective, Trump will endorse the compromise. If he wins, the lame duck session can move forward. Mr. Biden may be pressed to hold out for a larger bill but that doesn’t make a lot of sense. To the extent aid is needed, it is needed now. Ask the airlines or restaurant owners. Mr. Biden could always come back with another package if needed. It would be a bad start, in my opinion, for him to announce in November his willingness to wait until February for additional stimulus, especially if he can’t guarantee himself 60 votes in the Senate. Democrats may want to change the rules to require all votes in the Senate to pass with a simple majority, but rule changes take time and use up political capital. Finding a bipartisan solution would be more favorable. Thus, while many suggest no additional aid coming until the new term, I think we will see something passed early in the lame duck session. The stock market would like that, particularly if it came with some bipartisan support. The downside for stocks would be if bad politics overrides good policy and Congress sets itself up during the lame duck session for four more years of gridlock.
With less than two weeks to go, all eyes are focused on the election. Before offering my thoughts, I want to go back to 2008. In some ways, it is a similar time. On Election Day 2008 the U.S. economy was right at the bottom. Post the mid-September fall of Lehman Brothers and the government bailouts in some fashion of Merrill Lynch, AIG, and Fannie Mae, Congress by Election Day had already passed TARP (on its second try). But markets were in gridlock. The commercial paper market was barely alive. Americans were fearful to put money into banks. The Reserve Fund gave up supporting its $1.00 value. Stocks hit twin bottoms in mid-October and mid-November. President-elect Obama was an unknown factor. Economically, the economy was being steered by Fed Chairman Ben Bernanke, Treasury Secretary Hank Paulsen, and NY Fed President Timothy Geithner. Two of those three would continue into the Obama Administration, with Geithner becoming the new Treasury Secretary. Treasuries began to stabilize in October. High-grade corporates got their footing in the late fall. Junk bonds hit bottom in January. Stocks finally bottomed in March.
This time we are also coming out of a deep recession. But in contrast to 2008 when the bottom of the economy and the election were almost at the same time, the bottom this year was in April. The economy isn’t fully healed, however. Most feel more stimulus and ultralow interest rates will be needed for some time. Some Federal Reserve governors suggest that it may not be until 2023 until it can raise rates. I caution though that history has shown that the track record of Fed Governors and Presidents is awful. That means rates could start to rise in 2021 or they may not rise for many more years. What we did learn post-Great Recession is that the Fed is very timid when it comes to taking the first tightening step, no matter how small. With the cookie jar wide open, no one wants to even talk of the possibility of ever putting a lid back on.
That brings us to today as we analyze the probabilities in front of us. I will label five.
Trump wins and Republicans sweep Congress– I put the odds of this at near zero unless there is a monumental October surprise awaiting us. No one is suggesting that Republicans retake the House at this point. If that would happen, however, more tax cuts would be proposed, and another effort would be made to repeal Obamacare. Wall Street would celebrate. But the odds of this are so small that I will move on.
Trump wins and Congress is split – Even if Trump wins, he is likely to have an even smaller majority in the Senate. The only seat Republicans are likely to pick up is in Alabama, and they are likely to lose Arizona and Colorado with at least a half dozen others rated tossup. All this suggests four years of gridlock. Market moving actions will come from Executive Orders or the Justice Department (e.g. attempts to break up large tech). Wall Street would like this scenario, but the response would be tepid. Trump would most likely resume the use of tariffs, something Wall Street doesn’t want to see.
Biden wins and Congress is split – In some ways, this may be the best outcome. Biden would press for more spending, both in response to the pandemic and the need to rebuild infrastructure. But the progressive voice in his left ear would be muted without the ability to get the votes needed in the Senate. Biden would face a swelling debt and accelerating growth in entitlement payments as more Americans reach 65. That will hamstring efforts to originate too many new programs. What he can’t get through Congress, he may try to get through Executive Order. At this juncture, it is probably correct to think of Biden as a one-term President given he would be 82 if he chose to run again. In some respects, I equate him to Gerald Ford, a likeable guy without a strong policy mission. He will be more of a healer, a transition to the next phase of American leadership. Except for President Obama, we have been led by the Baby Boomer generation since 1992. That will likely come to an end in 2024. Who leads the next generation politically is quite uncertain at this point in time.
Biden wins and Republicans gain leadership of both Congressional Chambers, but only marginally win the Senate – I separate this from the next win, the real Blue wave. Indeed, I think this has a chance to be the most likely outcome, if current polls hold up. One must realize that many of the new Senators in this scenario come from traditionally Red states. They are not going to willingly follow a progressive agenda. They won’t want to see $3 trillion annual deficits. They could exercise the same control as Blue Dog Democrats did with Bill Clinton in the 1990s. While Wall Street may not celebrate this outcome initially, it is probably the one that offers the best outcome. Spending where needed, but reasonable controls. The new centrists, should they want to stay in office, will need support from Republican voters if they want to run again. Many feel that if Biden is elected, he will be captive to AOC, Bernie, and Elizabeth. Even if he wanted to appease them in some way, he will be yanked harder to the center if he wants to get anything done.
Biden wins in a Blue wave sweep – This means taking most of the tossup Senate races and getting to 54 or more seats in the Senate. Wall Street would not like this. Yes, it would like to see more spending, but if the economy starts to overheat inside Biden’s four-year term, this is potentially the most destructive of the five possible outcomes. This is government without many checks and balances, at least for the first two years. The early spending might be appealing to some. But not the attendant tax increase or the unintended economic consequences to follow.
Government works best when there is a balance and a willingness to compromise. In recent years, and I am including years long before Trump, compromise has vanished. Since 1960 we have seesawed back and forth between Republican and Democratic administrations. Each time a new administration attempts to reverse what the previous one did. As partisanship has increased, the long-term investment horizon for businesses has gotten cloudier. The net result has been less investment and slow productivity growth. I don’t have illusions that, should Biden get elected, that he will eradicate partisanship. But if he can even begin to move in that direction, it may become his most important legacy.
For 8 years under President Obama and for the first 3+ years under Trump (pre-Covid-19), our economy grew about 2% in real terms, with a bit under 2% inflation. There was remarkably little deviation from that path. Demographics and monetary policy are much more drivers of growth than Presidential action. But Presidents define the mood of the country. When the mood is positive (think Clinton and Reagan), we move forward. When the mood is sour (Nixon or Carter), we struggle. Whatever the outcome, hopefully as Covid-19 fades and life gets back to normal, we can all feel better than we do now.
Today, TV Judge Judy Sheindlin is 78.
James M. Meyer, CFA 610-260-2220