Mike Pyle, Global Chief Investment Strategist together with Elga Bartsch, Head of Macro Research and Scott Thiel, Chief Fixed Income Strategist, both part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.
The U.S. election is taking place against a historic backdrop of a pandemic, recession and domestic strife. The outcome could have significant implications for key policy areas: fiscal stimulus, public investment, taxation, regulation and foreign affairs. It also has the potential to supercharge structural trends such as an increased policy and market focus on sustainability.
Democratic nominee and former Vice President Joe Biden looks to have an edge in the race, leading President Donald Trump by about seven percentage points in recent national polls. This lead has been remarkably stable this year. Yet his lead is narrower in decisive electoral states that could still give Trump a path to re-election. See the chart. The contest for the U.S. Senate – key to a potential Biden administration’s ability to implement its agenda – appears close to a tossup. We see three plausible scenarios to plan for: 1) a Democratic sweep of the White House and Congress (with Democrats winning control of the Senate); 2) a Biden win with a divided Congress; and 3) a status quo Trump win. The pandemic has helped create historically challenging circumstances for the election, including a leap in mail-in voting that could complicate vote counting, delay results and trigger legal challenges. We see a material risk of a contested election or a delayed result. Election day could turn into weeks or months.
We see fiscal policy as the most critical area to watch, as it has been helping bridge the economy through the Covid shock. The two Biden victory scenarios would look very different through this fiscal lens, in our view. A Democratic sweep would likely pave the way for a new round of large-scale fiscal stimulus and boost spending on clean energy, transport and housing – but also increase taxes for companies and the wealthy. A Biden win with a Republican-controlled Senate would lead to much less ambitious fiscal stimulus and infrastructure spending, and no major tax changes. The net difference in fiscal spending between the two scenarios could be several percentage points of GDP over each of the next few years, we estimate. Fiscal spending under a second Trump term would be somewhere in the middle between those two scenarios.
The election result will have implications for the key geopolitical risks we track. A Biden win – under either scenario – would likely signify a return to more predictable trade and foreign policy, supporting emerging market assets and broader risk sentiment in the short term. Yet we see U.S.-China rivalry staying structurally elevated across dimensions such as technology, trade and investment under Biden, due to bipartisan support for a more competitive stance on China. Climate policy would also be a major focus. The U.S. would likely immediately rejoin the Paris Agreement and increase its emissions reduction goals. Its fiscal plans could help supercharge a globally coordinated green stimulus effort, adding to recent efforts by the European Union. A Trump win, by contrast, would likely lead to a doubling-down of the “America First” stance on trade and immigration.
We think a “tax-centric” election analysis — with a Democratic sweep seen as a market negative, and divided government a positive — is too simplistic. In a Democratic sweep scenario for example, investors would have to balance higher taxes and tighter regulation with greater fiscal support and predictable foreign policy. We see the main implications of this scenario in fixed income and leadership in equity markets. It could push long-term rates higher and lead to a modest steepening of the Treasury yield curve. Domestically oriented equities, including small caps, might benefit the most, whereas higher taxes and tighter regulation could pressure large caps. This scenario would add to reasons to prepare for a higher inflation regime and reinforces our strategic underweight of developed market nominal government bonds. The tectonic shift to sustainable investing will likely persist regardless of the result, but could be supercharged under a Democratic sweep scenario.
Economic activity is running ahead of expectations in developed markets, albeit at different paces due to varying virus dynamics. Market volatility is returning after months of steady advances in risk assets, and we see elevated volatility ahead of the November U.S. election. The window appears to be closing for any new U.S. fiscal package before the election. The pandemic is still spreading in many countries; and U.S.-China tensions are running high.
The first U.S. presidential debate will be a focus. Some U.S. data next week will be key for gauging the status of the economic recovery. Markets expect U.S. consumer confidence to rebound from a six-year low in August, and nonfarm payrolls to grow at a slower pace than a month earlier. Concerns about the recovery running out of steam are rising as the risk of fiscal fatigue is crystallizing in the U.S.
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