Stocks fell modestly yesterday in front of last night’s debate amid little news.
The debate turned out to be like none other. And I am not sure either side gained from it. President Trump, behind in almost every poll, came out swinging, interrupted constantly, played by his own rules, but made few points. It was a disastrous performance. Former Vice-President Biden, less known for his leadership skills and wanting to show that he could be Presidential, stumbled under the constant pressure, made few clear points, and said more with body language than with words. It too was a disastrous performance. No one won. The loser, the big loser, was the American public. They learned little beyond what they already knew. Mr. Trump thrives on chaos. We know that and he promised more to come. We don’t know what Mr. Biden thrives on. Outsiders, including progressives and the President, have tried to put labels on Biden. Last night was his time to establish his own self. He wasn’t given the chance. Maybe the next two debates will be more settled. Maybe they will give more answers. Non-Americans can only look at what happened last night and shake their heads.
But as bad as the debates were, they aren’t moving markets this morning. I often say that markets lack a conscience. They have no morals. They only care about earnings and interest rates. Nothing said last night is likely to move that needle.
If Mr. Trump is reelected, from an economic standpoint, he will face four years of gridlock. His second term, in a sense, will rhyme with the second term of President Obama. Congress will give him no support, assuming the Democrats retain the House. He can try to govern by Executive Order, but the power of Executive Order is limited. Any actions can be reversed by the ensuing President, just as Trump has done to the majority of Obama’s Executive Orders. It will take a crisis, like a pandemic, to get Congress to act. What he can and will do is continue to pack courts with conservative jurists if, and it’s a big if, the Republicans retain the Senate.
Many presume Mr. Biden will be an economic disaster, especially if Democrats run the table and take control of both chambers of Congress. President Obama had full control in his first two years. He barely got the Affordable Care Act over the finish line. He got financial reform as well, something any President was going to get in the wake of the worst financial crisis since the Great Depression. That was it. Mr. Biden will push for higher taxes on those earning over $400,000. Despite the rhetoric, no one will end up being excluded from higher taxes. Corporate tax rates could climb back to or toward 28%. New individual brackets for high income individuals are possible. So are higher capital gains tax rates and an increase in the estate tax. Trust and estate lawyers will be overwhelmed in December if Mr. Biden is elected with majorities in Congress.
But history shows that changing tax rates have remarkably little impact on financial values. If you sell a stock with a lot of built in gains, you will have to pay more taxes. It may stop some from selling, but the great bulk of investing today is done by institutions that pay little attention to tax consequences. This includes algorithmic trades, hedge funds, mutual funds, and pension funds. It also includes your own IRA and 401k plan.
What we will see from Biden is an attempt to spend more on health care (including Covid-19 relief), infrastructure, and pure research. Democrats are synonymous with more government and that costs money. He will likely increase spending faster than he increases taxes. That means more GDP growth and more debt. That debt will matter when interest rates rise, but the increased spending will help GDP growth and earnings up front.
Thus, it is quite possible that Trump won’t be as good for markets as most believe, while Biden may not be as bad as most think. For the eight years of the Obama Presidency, GDP grew just about 2% in real terms, with inflation running a tad under 2%. For President Trump’s first 3 years (excluding Covid-19 affected 2020), growth was a shade over 2% with inflation a tad under 2%, virtually the same. The President matters a lot less than you think. What matters the most is monetary policy. The Fed has said rates are going to stay low for a long time, at least until we get close to full employment levels. That isn’t going to happen until 2022-2023 in the opinion of most. And it isn’t dependent on who becomes President. Demographics also matter. As millennials start to grow families, that will matter. Immigration numbers matter. They add to the work force and foster growth. Biden would be better on that count than Trump but the impact early on will hardly be noticeable.
It is hard to say that the debate last night was good for the market, but maybe it was. There were no surprises from Trump, and none were expected. If you liked him before, you like him now. If you didn’t like him before, you still don’t. Pure Democrats and anti-Trumpers are going to vote for Biden. There wasn’t a big hope that Mr. Biden would exhibit his own strong personality last night, and it didn’t happen. What also didn’t happen was some sort of catastrophe that would turn the entire election upside down. That catastrophe is the specter that the next President will be chosen by politicians and the Courts rather than the American people. Whatever the odds of that happening, they weren’t changed last night. If you remember the Bush/Gore election of 2000, for that to happen requires an ultra-close election in a swing state. Not a close election, an ultra close election as in a 10,000 vote difference or less. That is just conjecture at this point in time. We can ignore it for now. Moreover, if the markets lack conscience, as noted before, and assuming the next President is either Donald Trump or Joe Biden, then markets will remain focused on earnings and interest rates, not on a nasty court battle for the Presidency, as strange as that may sound.
Thus, in financial markets, we start today like we did when the markets closed last night, and they will move up or down reflecting economic fortunes. The number of new Covid-19 cases will be more impactful than last night’s debate.
The question ahead for investors is not which President is more consequential for America, but which President is economically more consequential for America. The two questions clearly have some overlap, but as futures show this morning after last night’s farce, the overlap is less than most think.
Hamilton’s Christopher Jackson is 45 today.
James M. Meyer, CFA 610-260-2220