By David Bailin
Chief Investment Officer
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History may not be a guide to the outcome of November’s presidential elections nor its implications for investors.
For decades, the performance of the S&P 500 and levels of unemployment have been used to forecast US Presidential elections. The track record of each model is solid as the S&P 500 and employment have generally moved together. And yet, as we move towards the November election, we can be certain that one of these indicators will be wrong. With small data sets, like Presidential elections, the risk of following any specific model or polls is real. Just look at 2016.
At the beginning of 2020, the US economy was strong and therefore favorable for the re-election of President Trump. However, the blunt economic impact of Covid-19 and the federal government’s controversial and inconsistent health policy responses to the pandemic have flipped the Electoral probabilities for November.
Since the virus first emerged in the United States in January, weekly jobless claims leapt by more than 3000% to as high as 6.9 million. Even this past week’s figure of 1.4 million is still double the highest level seen in the 2008 financial crisis. The unemployment rate, the most commonly referenced indicator, tripled in one-month from 4.4% in March to 14.7% in April, with only a partial recovery through June. With levels of infections at extraordinary rates in much of the US, it is unlikely there will be a dramatic further reduction in unemployment before the election.
Looking at the stock market, one sees a completely different picture. In fact, viewed on the basis of the performance of technology stocks in particular, or the S&P 500 generally, one could argue that the government response to the pandemic has been highly effective. We have written previously that the passage of the CARES Act and the Federal Reserve’s full commitment to markets and business provided an initial bridge over a deep chasm. The fact that these actions took place at a time of deep divisions within government could be considered a great success. But polling data suggests the President is receiving little credit for this.
This year, polling currently favors the employment model rather than the stock market model for ascertaining political fortunes. The crucial question is “Are you better off today than you were four years ago?” This depends largely on whether someone is an investor, a small business owner, or an employee of a deeply impacted sector. Investors exposed to a handful of stocks are likely to be very satisfied. “Covid-defensive” companies have been net beneficiaries of the acceleration of favorable business trends, like digitization. But for many furloughed employees, small business owners, or concentrated investors in many industries, it is hard to see how they would not answer the “better off” question negatively. On Thursday, 2Q GDP was released, showing a 33% annualized economic decline and a correspondingly large increase in the so-called “output gap”.
Read: CIO Strategy Bulletin.