We are now some three months since the market low in March and economic data is decisively showing that the world is returning to life.
In the US, and to a lesser extent in Europe and the UK, economic data is now starting to surprise on the upside. This is a dangerous moment though. In the coming weeks, governments must conduct the hand-off from crisis-era fiscal and monetary support to the medium-term support that will be needed to cement a recovery.
This moment reminds me of the song lyric ‘All my life, watching America.’ It is the US that is drawing all our focus. America has led the economic recovery through the brute force of its monetary policy and the resilience of its industry. It has also proved the only major advanced economy to resist the sort of gradual release from lockdown that the rest of us have embraced. For this reason, it remains the developed world’s best hope for a rapid V-shaped recovery, and the greatest risk to this occurring.
Recent weeks have seen a significant rise in virus infections in the Southern states. This includes the economically important states of California and Texas. To listen to the rhetoric from President Trump one could be forgiven for worrying that the virus will be ignored and these new infections will balloon into a fresh crisis. However, there is strong evidence that the local governors are roundly ignoring the Federal government and themselves moving to control these new outbreaks. For this reason, it remains our base case that US infections and deaths will overall continue to fall and will not jeopardise the re-booting of the global economy.
As we are all watching America anyway it is perhaps time to discuss something other than this virus. In November we will see the extraordinary spectre of the US Presidential elections played out against the bleak backdrop of pandemic and racial tension. I vividly remember the last election. I hosted an election party for financial journalists and clients for which my firm purchased (for reasons known only to the marketing department) two life-sized cut outs of Hillary Clinton and Donald Trump. As we didn’t want to throw them away they came back to my hotel room. The sense of dystopian panic I felt in the morning learning of Trump’s victory whilst he starred down at me from beside my bed is not an experience I would like to repeat.
Many are prone to say that ‘Trump is bound to win.’ It is easy to see his re-election as the latest in a long line of poll-defying events that are achieved by an angry and ignored electorate hoping to wrong-foot the political class and its pollsters. However, we should remember that this time Donald Trump is far further behind Joe Biden than he was behind Hillary Clinton. He now stands about 9 percentage points behind. This is about twice as big a gap as at the 2016 election. The polls make Biden the clear frontrunner both in terms of vote share and in the crucially important swing states. For example, in Wisconsin – the swing state that put Trump over the line in 2016 – Biden boasts a lead of 6.6%. He is also appearing competitive in rapidly changing states such as Arizona which was historically a Republican stronghold but now sees Biden leading by 4%. He is only down to Trump in Texas by 0.7%.
Almost as importantly as this, the poor economic news supports the replacement of an incumbent. Not to mention the good sense that one must hope reasonable people have when appraising Donald Trump’s performance.
As it stands Biden is the probable victor and markets are just digesting this reality. Whilst he is hardly a hostile force, he is also no big-spending, tax-cutting populist. On balance Biden’s poll lead is likely to drag on US equity markets in the months ahead.
It is however too early to give up on the idea of a Trump revival. Of most crucial importance to him will be achieving a fast bounce-back in economic activity in the months ahead. Polls still show that on the crucial subject of ‘who do you most trust with the economy.’ Trump leads Biden by around three percentage points. A robust and quick recovery would buoy this position. This gives Trump a clear, if somewhat unlikely, path to re-election. Whilst a path to winning the popular vote looks close to impossible there are tipping point states such as Minnesota which could move to Trump. Because Biden leads by far less in the swing states than he does nationally it is entirely possible that Trump’s overall poll deficit slips to the 4%-5% he suffered to Hillary Clinton and he grasps another narrow win through the electoral college.
The Economist now places an 81% probability on a Biden victory, but we believe it will be a far closer thing than this. However, if the current strong polling for Biden persists, we should watch closely the policy action that is proposed in US
sectors such as cash-rich technology companies and healthcare stocks. These businesses have enjoyed exceptional levels of outperformance in recent years because of their growth credentials. However, both will be in the cross-hairs of an incoming Democratic administration looking to boost tax revenues and reduce healthcare bills.
Watching America will be fascinating for the rest of the year – albeit more enjoyable from the relative safety of our spot the other side of the pond.
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