The Broad View
No matter its form, political change is likely coming to the U.S.
Jared Franz

As a pivotal U.S. election approaches, one thing is becoming increasingly clear: Profound policy changes are on the horizon no matter which political candidates prevail.

Certain critical issues facing the nation — income inequality and rising health care costs, for instance — have reached inflection points where Democrats and Republicans alike are proposing solutions that would have been politically untenable just a few years ago. The only questions, in my view, are how quickly policy changes will come, whether they will be sweeping or incremental, and how they will affect the U.S. economy and markets.

With those questions in mind, a multidisciplinary research team at Capital Group recently took a deep dive into the issues.

  • In the long-running conflict between labor and ownership, the political pendulum is swinging toward labor, but that turn may not be as strong as investors envision.
  • Some key issues — such as affordable health care, higher paying jobs and addressing the nation’s deteriorating infrastructure — are not solely a focus of the American political left. The right will also likely pursue these important goals, but with broadly different policy tools.
  • Large deficit spending will almost certainly continue regardless of which party is in power. However, the opposition party may find a return to fiscal restraint politically useful after the Nov. 3 elections.

There are some potential areas of agreement.

COVID-19 economic recovery. If COVID-19 is not contained, the 2021 legislative agenda will likely focus on economic recovery. Depending on the path of the pandemic, additional stimulus bills could be on the way, along with other fiscal and monetary stimulus measures. To underscore how much the political lines have blurred, a GOP senator in April proposed that the federal government cover up to 80% of wages for all employees of U.S. businesses impacted by state-imposed lockdowns. More unconventional approaches may be necessary in the event of another COVID wave next year.

U.S.-China trade tensions. Largely viewed as a Trump-induced conflict, U.S.-China trade tensions wouldn’t miraculously disappear under a Biden administration. A growing bipartisan consensus in Washington views a tense U.S.-China relationship as a long-term reality that will shape trade and foreign policy decisions for many years to come. One area of broad agreement is the need for greater protections for intellectual property.

Technology regulations. Both parties have expressed frustrations with Big Tech companies, raising the prospect of antitrust actions, tougher regulations and greater oversight in the areas of privacy protection and suppression of political viewpoints. A breakup of perceived tech monopolies might be more likely under a left-leaning government, but there are supporters of this move on both sides of the political aisle.

And there are areas of disagreement, as well.

Tax policy. Taxation is undoubtedly the biggest source of disagreement, with Democrats proposing higher income taxes for corporations and wealthy individuals, along with a capital gains tax increase, and Republicans arguing for deeper tax cuts as a follow-up to the Tax Cuts and Jobs Act of 2017. On the political left, there is also strong support for increasing the federal minimum wage, while the right may prefer to limit low-wage immigration as a way to boost employees’ wages.

Education. Attempts to solve education inequality are highly partisan, and we are likely to see drastically different paths under a Democratic or Republican administration. A right-leaning government would favor school choice initiatives and reducing the influence of teachers’ unions, while a left-leaning government would likely pursue greater investments in public schools, early childhood development and student debt relief.

Immigration. Another highly partisan issue, immigration policy is likely to undergo major change if Democrats win the White House and the Senate. We could see an easier path to citizenship for an estimated 11 million undocumented immigrants living in the U.S., along with expanded protections for asylum seekers. A Republican administration would likely continue to increase border security and seek to limit low-wage immigration.

No matter the outcome, the election could have broad investment implications.

Equities. Equity markets are likely to continue benefiting from a low interest rate environment under all four likely election scenarios — Trump wins and the Senate remains in Republican control; Trump wins and Democrats take the Senate; Biden wins and Democrats take the Senate; Biden wins and Republicans maintain Senate control. Growth-oriented stocks are particularly attractive with rates at historic lows. However, periods of extreme volatility should be expected, given the economic uncertainty that prompted central banks to pursue zero- and negative-rate policies in the first place.

Fixed income. Yields for 10-year U.S. Treasury bonds are likely to remain in the range of 0.5% to 1.5% under three of the four scenarios. The exception could be the so-called blue wave scenario — Biden wins the White House and Democrats take the Senate — in which case, bond yields could move higher (1.5% to 2.0%) as a Democratic administration finds it easier to advance its policy agenda, potentially boosting U.S. economic growth in the process.

Sector impacts. Broadly speaking, sectors and companies that stand to benefit from the substantial political change of a blue wave include health care plan operators, environmentally focused companies (solar, wind, electric, etc.), discount retailers and small technology firms. A right-leaning government would likely foster a relatively more favorable environment for pharmaceutical companies, U.S.-based manufacturing companies and the energy industry.

That said, it’s important to remember that attempting to time the markets based on expected political outcomes has proven to be an extremely difficult task. History has shown that long-term investors are better served by staying invested — even during times of substantial political volatility — as markets have tended to power through even the most tumultuous election cycles.

Jared Franz is an economist with 15 years of industry experience as of 12/31/20. He holds a PhD in economics from the University of Illinois at Chicago and a bachelor’s degree in mathematics from Northwestern University.

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