COVID-19 Changes Policy and Election Politics

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COVID-19 makes it too early to call the presidential race

by Paul Christopher, CFA, Head of Global Market Strategy

Key takeaways

  • The two major party nominees now seem clear, and they face predictable challenges to maintain support (for the incumbent), build additional support (for the challenger), and generate turnout (for both candidates).
  • But COVID-19 likely forces the nominees to adjust their election strategies—and obliges statisticians to adapt how they predict voter turnout.
  • In our view, it’s too early to have confidence about predicting a winner in either the presidential election or in contests for control of Congress. We prefer to focus on economic fundamentals and the likely sequence of recession and recovery that we expect in the coming year.

COVID-19—a wild card for electoral politics

History tells us that an economic recession becomes a large obstacle to a president’s reelection. Presidents Jimmy Carter and George H. W. Bush failed in their reelection bids after economic recessions late in their terms. Polling data 14 months before their elections reveal that their declining job approval ratings had fallen below 40% approval prior to Election Day (Chart 1). Presidents who were reelected had rising approval ratings ahead of the election, even if the rating was below 50% on Election Day (President Barack Obama). President Donald Trump’s approval rating was tracking higher and was close to President Obama’s—until the coronavirus crisis hit in March—but it may rebound, depending upon how effectively the administration responds to the crisis.

Chart 1. President Trump’s job approval rating was trending with President Obama’s—until March

Chart 1. President Trump’s job approval rating was trending with President Obama’s—until March
Sources: Gallup and Wells Fargo Investment Institute. Latest month shown is March 2020. The data depict the monthly percentage of survey participants who approve of the president’s performance in office. Responses are shown for the 14 months prior to a sitting president’s reelection bid.

Former Vice President Joe Biden is making his third run at the presidency, and he faces an important challenge to unify his party. Vermont Senator Bernie Sanders left the race on April 8, leaving Mr. Biden as the presumptive nominee. Yet, Mr. Sanders plans to remain on primary ballots, to acquire more delegates for influence over the party platform at the convention. Meanwhile, voters loyal to Mr. Sanders may require significantly more concessions from the nominee to turn out on Election Day. The choice of a running mate is also a key decision that can affect the party’s unity and appeal to undecided voters.

Broad media attention should attend Mr. Biden’s announcement—and whether he will make that announcement at or before the convention is an important decision.

But the COVID-19 crisis poses unique challenges for Mr. Biden. First, it is difficult for any candidate to match the media attention that the president attracts at his daily COVID-19 briefings. A more pressing problem is that social distancing precludes large campaign rallies that typically provide important media exposure and generate funds. In March, Mr. Biden reported his largest fundraising monthly total of this campaign, adding $46.7 million (versus $13.6 added for President Trump) during the first month that he has been the presumptive Democratic nominee. However, Trump and his party are still nearly $187 million ahead of Biden and the Democrats.1

What kind of turnout?

Turnout is a crucial factor in any election, but COVID-19 makes prediction unusually tough. For example, it’s not clear whether normally likely voters will stay home, or whether normally unlikely voters may turn out to vote out of boredom. Turnout is even less clear because both parties offer competing proposals for how to vote safely amid COVID-19. Democrats favor a simpler process to request and return mail-in ballots. Republicans counter that mail-in ballots lend themselves to fraud. Currently, five states send mail-in ballots to all voters, while roughly a third of the states require a formal request for an absentee ballot.

The important point is that turnout above 56% of voters has correlated with one-party control of the White House and Congress; below that 56% threshold tends to produce split control, often associated with policy gridlock. So getting out the vote not only will have a bearing on the presidential and congressional results, it could shape the magnitude of policy changes that the next administration can enact.2 In sum, how each party deals with the COVID-19 crisis may dominate the factors that historically predict elections.

Fiscal relief during the Great Recession 2.0—to infinity and beyond?

by Gary Schlossberg, Global Strategist

Key takeaways

  • A “phase-4” fiscal package now under discussion likely is the latest in recurring government support that is expected to evolve from relief during the worst of the 2020 economic slump to stimulus once the economy is positioned for renewed growth.
  • Similar to the 2008-2009 cycle, we expect the financing of a sizable jump in the federal deficit and debt to be absorbed with minimal financial-market disruption. This could delay debate over how best to contain the rise in the federal deficit and debt from levels that are approaching the peak readings during World War II.
  • Lingering fallout from the pandemic and containment efforts likely will prevent U.S. fiscal support from providing the temporary economic lift that the 2017 tax cuts offered. A more measured corporate revenue and profit recovery should continue to favor quality investments in U.S. large-cap technology, social media, and other resilient sectors over economically sensitive industrials and materials producers.

A fiscal drumbeat of government support

The “i’s” hadn’t been dotted nor the “t’s” crossed on last month’s $2.2 trillion fiscal-relief package before talks began on a fourth program for a COVID-19-shocked economy. The act that resulted was more supportive than stimulative for an economy in a deep dive. A compromise $484 billion act passed by Congress in late April includes more than $300 billion in added small-business assistance, $75 billion for hospital and health care provider pandemic-related reimbursements, and $25 billion for expanded coronavirus testing. Expanded aid to state and local governments is likely to come soon.

Time, or the lack of it, has helped to drive the latest compromise fiscal package through Congress. Last month’s $2.2 trillion package was viewed as insufficient to bridge household and business financial shortfalls during the worst of the slump. Greater clarity on the pandemic’s trajectory and households’ and businesses’ reaction to that news likely will determine how much more government support is needed. The fiscal stimulus in response to COVID-19 that has already passed amounts to nearly 13% of gross domestic product (GDP). In absolute dollar amounts, this exceeds fiscal stimulus equivalent to 11.5% of GDP during the likely less severe recession in 2008-2009 and New Deal spending that was equivalent to about 40% of GDP, in total, during the 1930s’ depression.

Future fiscal support beyond what has been called an interim “phase 3.5” package likely will shift from relief to economic stimulus as the pandemic’s effect recedes, businesses reopen, and households are more receptive to spending incentives. Next up likely will be a hybrid between support and stimulus, centered on hotly debated financing of state and local budget shortfalls and more stimulative infrastructure funding. Beyond that are possible payroll and other targeted tax incentives and, perhaps, a Democratic push for lower income-tax cuts and elimination of the $10,000 federal cap on state and local tax deductions.

Nearly lost in the fiscal debate is the impact on federal debt levels; the market’s appetite for Treasury financing; interest rates; and, ultimately, financial stability. The federal debt debate, suppressed for now, could resurface as investors are confronted with extraordinary, double-digit federal deficits as a percent of GDP this year and next, lifting marketable Treasury debt past 100% of GDP from less than 80% during the last fiscal year that ended on September 30, 2019.

Financing the debt should benefit from the Federal Reserve’s nearly-unlimited appetite for Treasury securities today—and from historically low interest rates suppressing government financing costs and investor resistance to soaring federal debt (Chart 2). Moreover, investors’ reduced demand for corporate debt in a recession could leave more room for Treasury-debt issuance during the worst of an economic slump. Lastly, the dollar’s enhanced role as the key currency in world trade and finance implies an increased demand for Treasury securities by foreign investors even as financial-market conditions stabilize.

Chart 2. Lower interest rates suppress investor concerns over federal deficits and soaring debt

Chart 2. Lower interest rates suppress investor concerns over federal deficits and soaring debt
Source: U.S. Treasury Department, data as of April 10, 2020.

Will tariff cuts ride the wave of fiscal stimulus?

by Gary Schlossberg, Global Strategist

Key takeaways

  • Tariffs ultimately could be a casualty of the economy’s deep dive, a victim of an intense focus on financial and cost relief for hard-pressed firms, in addition to direct loans and other aid.
  • How far the trade-policy debate swings from protectionism likely will depend on the election, along with the depth and duration of the deep economic slump set to influence both.
  • Benefits from reduced trade tensions to economically sensitive industrials, materials producers, financial services stocks, and U.S. multinationals overall are likely to be overshadowed, for now, by recession fears favoring quality investments in U.S. large-cap technology, social media, and other economically resilient sectors.

From shining star to also-ran

Lost in the drama over the economy’s free-fall has been the tilt away from trade protectionism. Trade’s descent from a key economic-growth driver on news of a phase 1 U.S.-China trade accord to a policy also-ran points up the changed economic landscape over the past month, in which cost relief to cushion slumping sales now is paramount from tariff cuts on $360-$370 billion of China’s U.S. sales.

Opponents of the tariff cuts argue that they risk slowing the return home of global supply chains and undercutting leverage against an economically weakened China in upcoming, phase 2 trade negotiations. More compelling counterarguments include the potential lift to household and market sentiment from tariff cuts—critical to sparking an early economic recovery—and the potential lift to U.S. exports and to slumping global trade and economic growth that already has declined to recession levels (Chart 3). All told, the IMF estimates a $450 billion, or 0.5%, lift to global GDP (under less recessionary circumstances) if all U.S. tariffs on China are eliminated.

Chart 3. Slumping world trade and global growth are anxiously awaiting protectionist relief

Chart 3. Slumping world trade and global growth are anxiously awaiting protectionist relief
Sources: IHS Markit, Inc., Netherlands Bureau for Economic Policy Analysis, April 15, 2020.

Aligning stars

China is doing its part to soften opposition to further tariff cuts by complying with the terms of the phase 1 trade agreement, including recent tariff cuts and lowered barriers to U.S. electronic-payment systems. China’s still-weakened economy also provides cover for the United States to remove unrealistic export goals for U.S. sales there.

Equally important is the political argument favoring U.S. tariff cuts in an election year. The president’s economic management has been his strong point in the polls, threatened by the economy’s free-fall and leaving him in a close race with former Vice President Biden as of April 24, according to a presidential poll taken that same day. Lastly, tariff concessions may leave the U.S. better-positioned for any future, phase 2 trade negotiations that touch on core grievances of the United States’ and China’s other trading partners.

There are no guarantees that reduced trade protectionism will be part of added economic stimulus. However, the stars are aligning for a further tilt toward less restrictive trade, which would be a welcome silver lining for financial markets and economies that have been shell-shocked by fallout from the viral pandemic and its oil-price impact.

A virtue in patience

Freer trade typically is good news for economically sensitive sectors of the stock and bond markets, but it may be less so during an economic slump. Recession risks are keeping our strategy focused on higher quality stocks and bonds in the more resilient U.S. market, keyed toward technology, social media, and other companies often able to sustain earnings performance and credit quality in a more challenging economic environment. That same approach extends to a preference for investment-grade bonds amid aggressive financial support from the Federal Reserve.

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1 “Biden Has Record Fundraising Month In March With $46.7 Million, But Still Trails Trump”, Jack Brewster in Forbes, April 21, 2020.

2 Source: Dr. Michael McDonald, “United States Election Project,” February 26, 2020. University of Florida. Based on data through 2016.