Pandemics and politics
All presidential campaigns are contentious affairs. Passionate rhetoric and critical commentary compete with exaggerated claims of disaster should one's preferred candidate fail to win the office. This year's election is no different. The contest will be held in the midst of a global pandemic, which has triggered an abrupt increase in unemployment and widened the economic disparities in society. Social distancing measures and business closures have had a pernicious effect on consumer spending, undermining the financial security of many families and motivating many citizens to air their grievances in public. All of which suggests that we should be prepared for an unusually high degree of partisan bickering in the weeks and months ahead.
Meanwhile, a surge in new hospitalizations has led governors in many states to reconsider earlier plans to loosen mobility restrictions. Routine daily activities now require individuals to undertake a daily exercise in risk assessment. Should I invite friends over to the house for a barbecue? Do I really need to visit the grocer again for an ingredient I neglected to purchase when I was there last week? More important and vexing questions loom on the horizon. Do I allow my children to return to school next month? Is it safe to travel to visit an ailing relative?
The Dallas Federal Reserve Bank has developed a mobility and engagement index to measure the degree to which Americans are sheltering in place or opting for social distancing. The index is derived from geolocation data collected from a large sample of mobile devices. After initially responding to a reopening of the US economy by travelling more frequently, the data now suggests that Americans are having second thoughts. Personal mobility in America's four most populous states has leveled off.
Anxiety levels are rising and are bound to have an impact on presidential and Congressional campaigns this autumn. The level of policy uncertainty also is expected to increase as the two presidential candidates share starkly different visions for the country. Markets detest policy uncertainty, so additional bouts of volatility are inevitable. However, these should pale in comparison to what we witnessed earlier this year when we saw four of the seven largest daily moves in the S&P 500 in the past 50 years occur within a two week period. The COVID-19-induced recession was an unprecedented unraveling of the economic and social fabric of society. Equity investors are more likely to take an acrimonious presidential campaign in stride. Meanwhile, on the fixed income side of the ledger, the Fed's willingness to ensure ample liquidity in fixed income markets should temper the degree to which bond yields fluctuate.
President Trump now faces an uphill climb in his bid for a second term. His approval rating, which reached as high as 45.8% in the first weeks following widespread infection in the US, has fallen to roughly 40%. More ominously for his reelection chances, his disapproval rate of 55.9% is approaching the worst levels of his presidency. Investors may be tempted to respond immediately to the probability that Joe Biden will win in November. The temptation is understandable given the incessant media coverage of recent polls, but investors should adopt a more deliberate approach. Modern US presidents have demonstrated a remarkable ability to win a second term. The sample set is admittedly limited, but it's worth noting that incumbents seeking reelection have prevailed in eight of the past 11 attempts. The noted playwright Aaron Sorkin once called the White House the "single greatest home court advantage in the modern world."
Tactical adjustments will be necessary as we get closer to the election, but should be made in the context of longer-term portfolio allocation decisions. A Blue Wave, where Biden captures the presidency and Democrats assume control of the Senate, currently is viewed as the most probable outcome. In that event, there is reason to believe that shorter term post-election volatility will give way to a more measured response by financial markets.
For those investors who are anxious to examine investment alternatives based on different election outcomes, the CIO Americas team has assembled tactical stock lists in advance of the campaign's home stretch after Labor Day. Our Campaign Warriors report, meanwhile, highlights equity alternatives that are better insulated regardless of the outcome of the election. As we ride out the rest of the summer, investors may be obliged to exhibit a high tolerance for ambiguity and uncertainty.
This article first appeared in the House View Weekly – Regional View US on July 13, 2020. Co-authored by Solita Marcelli, Head of CIO Americas, and Thomas McLoughlin, Head Americas Fixed Income, UBS Financial Services Inc.