Markets Already Tense Over Potential Policy Swings in 2020

Are Markets Underestimating the Odds of a Democratic Sweep?

Washington Policy Analyst Ed Mills discusses the timing of a second round of coronavirus relief, his current election outlook and other ongoing policy initiatives.

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Recorded July 6, 2020

Welcome to For What It's Worth, a podcast from Raymond James designed to help you plan, invest, and live smarter.

Paige Lenssen, CFA, Public Content Manager: Hi, listeners. Thanks for joining me. I'm your host, Paige Lenssen. You can find this episode and more For What It's Worth on Spotify and Apple Podcasts. In this episode, we'll be discussing all things Washington policy, from what a second round of COVID stimulus relief may look like to what a Democratic sweep of the U.S. election could mean for the markets. Joining me remotely to share his perspective is Raymond James Washington Policy Analyst Ed Mills. Ed, welcome back. It's good to be speaking with you again.

Ed Mills, Washington Policy Analyst: Likewise, thanks for having me back on.

Lenssen: When we last spoke, the CARES Act had just been passed, the $2 trillion stimulus relief act. Immediately, we were already talking about what a second round of relief might look like. How have things progressed since then, and how close are we to a second round?

Mills: I think things have progressed, but it's been more slowly than initially anticipated. What we've seen since the passage of the CARES Act is a couple of tweaks as well as a pretty big increase in spending or available funds for small businesses through the Paycheck Protection Program, the PPP. But now that we are in July, all eyes are on the July 31 deadline when unemployment benefits expire. And Congress always need a forcing mechanism; I always call it a crisis or a deadline. So with July 31 looming, those benefits set to expire, there is a real sense that, later in July, Congress is going to pass the next package. The size, scope are very uncertain. But I do think the key dividing lines are really around what to do with unemployment insurance, state and local aid, liability protections for businesses, as well as should there be any additional tax benefit or back-to-work bonuses trying to incentivize employers and employees to return to work wherever it is actually possible.

Lenssen: You mentioned the unemployment numbers – we just saw payrolls for June, and the U.S. regained or added close to 5 million jobs. It was generally a little bit more optimistic than most people might have expected. Does that have any impact on this second round of relief?

Mills: It’s a great question, Paige. It’s the second month in a row where we've seen better-than-expected job numbers. And yet to me, I think there’s a lot of questions that get raised as I look at it from a lens of, “what could the next fiscal relief package be,” versus answering any of those questions. What is clear is that there are still historically high levels of unemployment. There are a lot of people who are out of work. And unfortunately, we're in a situation where there's not as many openings as there are those who are unemployed. So it does very much influence the debate over how much unemployment benefits should be extended, at what level. But I do think the fact that we saw two months in a row with better-than-expected unemployment numbers, that does take a little bit of the immediacy off of Congress to act in a more robust way. If we saw a worse-than-expected jobs number, especially if it was two months in a row of worse-than-expected jobs numbers… I don’t think there'd be any question that the amount of the next phase of fiscal relief would be going up and that unemployment benefits would be extended as-is. With the better-than-expected numbers, I think it is more of a push towards seeing what else can be done for fiscal relief in the economy.

Lenssen: Do you think that a second round could include more direct payments, direct checks for individuals and their families?

Mills: Yeah, it seems that one of the areas of bipartisan compromise or agreement in [Washington] D.C. is there is another need to support the consumer and the average American who has been impacted economically by COVID-19. There is, right now, bipartisan support to do another round of the fiscal stimulus checks. It's unclear what that dollar amount is. And I think the other thing that I'm looking at, and sorry to keep going back to unemployment, but I think the way in which Congress thinks about it is there is a certain dollar amount that they want to dedicate towards helping the consumer. And as of right now, they look at that pot of funding and want to divide it between another round of checks, back-to-work bonuses and unemployment. To the extent that they think that pot it limited, that probably decreases the total dollar amount for each of those versus what we saw in the CARES Act.

Lenssen: Do you think that these packages, the first round $2 trillion, these multi-trillion dollar packages… is this going to impact how negotiations on future initiatives go? If something previously felt like it was too expensive to be passed, do these multi-trillion dollar packages change that conversation?

Mills: I think it’s a really great point. One of my first things I worked on when I worked on Capitol Hill was the aid in response to 9/11. And when that was negotiated – and I really tracked that for years, post-9/11 – and that aid package was $20 billion. And at the time, it was an unthinkable amount of money for a disaster. And I'm always reminded as to how much we thought that $20 billion package was to rebuild this country after a devastating terrorist attack. $20 billion right now is a rounding number. And it is astonishing to think that, fast forward to the financial crisis, and $700 billion was the amount that was included in TARP for the bailout of the financial services industry. And that was an unthinkably large number. And we're discussing this today and saying, “Oh, the next round – $1 trillion, plus or minus” seems to be a relatively low dollar amount in comparison to what has already been done. And I just remind folks that we are in the middle of the largest fiscal and monetary experiment in the history of the world. How that plays out and how that impacts future policy is far from certain in terms of how that impacts things. And I do think it's important to remind ourselves how large these numbers are.

Lenssen: Let's turn our focus over to some other policy initiatives that are happening right now that maybe aren't making headlines as quickly as coronavirus and fiscal stimulus relief initiatives are. The House of Representatives recently passed a $1.5 trillion infrastructure bill. Can you tell us about that bill – what does it include, and do you think we'll see any form of it eventually become law?

Mills: Yeah, great question, Paige. One of the hard things about D.C. is every so often there are these large initiatives that come up, and they seem to come out of nowhere. But the main way in which we fund infrastructure programs are through different highway or surface transportation bills. So the reason why you're seeing this infrastructure bill now coming from the House of Representatives is the surface transportation bill is set to expire at the end of the fiscal year, so September 30. And so without action, there is no funding to continue the run-of-the-mill work we do on surface transportation projects – think about the repaving of roads or the minor repairs to the roadways out there. And what the Democrats have proposed in their bill is to take that expiration and significantly increase what it does and significantly increase the dollar amount and increase the federal share of what gets paid for, at least over the next couple of years. So I do think that we will get some level of infrastructure bill this year, even if it's just a small, short-term extension of what is expiring as-is, and sometimes that in and of itself can come across as new. I don't think we get the big, $1.5 trillion package that Democrats are proposing. I think anything on a large scale infrastructure project is likely a post-election, early-next-year phenomenon and not something that we could truly expect between now and the election.

Lenssen: Looking internationally, you recently wrote that “the risk of geopolitical flare-ups is rising around the world.” Is that because of the pandemic, or is there something else going on?

Mills: It is because of the pandemic. We have a lot of countries looking more inward, but really the reason we wrote about that, Paige, was what's happening in the U.S.-China relationship. And what we've seen is that, since the signing of the phase one trade deal in January, we've seen a significant deterioration in the U.S.-China relationship, as the hawks, the hard liners in the Trump administration, are really in charge, and they are using the coronavirus as a big part of the push as to why Trump needs to continue to be harsh on China. And I think there is a question on whether or not, as the United States is dealing with the coronavirus, is that going to be an opportunity one of our other foes uses to challenge the United States. And so it's an election year. It is an uncertain world. A lot of countries are dealing with some unprecedented problems. Having geopolitical risk rise during that scenario is kind of to be expected. And that's why we wrote about it.

Lenssen: You mentioned that this is an election year; that changes a lot. We're going to get to that in just a second. But before we do, later this month, the CEOs of some of the big tech companies – so Amazon, Apple, Facebook, Google – they’re scheduled to appear before the House Subcommittee on Antitrust. What's going to be discussed, and what is it going to mean, especially for tech stocks that have been doing really, really well recently?

Mills: I think for the tech stocks themselves, as I have conversations about what D.C. can do on antitrust concerns, most investors that I speak with largely brush it off as noise. As you mentioned, this is a subcommittee in the House, and it’s a hearing, it is far from legislating, it is far from getting a bipartisan compromise, it is far from regulation. What I will take from this hearing is – this is Democrats who are in the majority in the House and are in control of this subcommittee. It will preview some of the agenda for a post-2020 election if Democrats maintain control of the House, if they have control of the Senate and/or if they have control of the presidency. And what I've told clients is, as important as the legislative potential, which is going to take a while, probably the more important thing for 2021 and tech stocks and their market valuations is going to be some of the regulatory posts that get filled regardless of the outcome of the presidential election.

Lenssen: Let's talk election. I'm going to ask you straight up: what's your base case outcome right now?

Mills: We published recently that we think that if you were to hold the election today, that we have given the edge to Joe Biden over Donald Trump. We think that the Senate is a toss up and Democrats are well-positioned to maintain control of the House of Representatives. That said, there is a long time between now and November 3, and a lot of things can happen. We wanted to let investors know, clients know, how we are thinking about it today. That does not mean our thinking will not evolve either in one direction or another. And we do highlight that, this year, we've had multiple events that individuals have said are the “election-defining moment.” We started off the year with impeachment. We had the killing of general Soleimani with Iran and a huge geopolitical flare-up. We had the signing of the phase one trade deal. We had COVID-19, civil unrest, the Black Lives Matter protests. All of these individual things are going to impact the election. I think that they are going to impact the election in unknown ways as we speak today. And we're going to add that sixth or seventh or eighth election-defining issue between now and November third. And so I think we go back to 2016 and have a great deal of humility that predicting the outcome of elections is very difficult, because you have some election-defining issues that you just don't know about until we get up into election day.

Lenssen: Is it clear yet what outcome markets are pricing in? You mentioned that, as of right now, your outlook is for a Democratic president, Democratic House, Senate’s a toss-up. Does the market right now seem to expect that as well?

Mills: We have been been polling our clients as we've done a number of the institutional calls. And over the last couple months, we have seen clients tell us that they had expected a Trump victory in the April, early-May timeframe by in the mid to high 50% range, to now where the market had swung and these clients are pricing in a Biden victory by a pretty sizable percentage of respondents. When we ask about the makeup of Congress, it does seem as if the market has not priced in the potential for a Democratic sweep and what those policies would look like. And I think that the other question is pricing in who wins these elections is much more nuanced this time around because of the need economically for more fiscal relief. Or that's what the Fed (Federal Reserve) tells us, that's what economists tell us. Some of the uncertainty that exists in the U.S.-China relationship. So I do always want to remind folks that we should avoid, “this candidate good, this candidate bad for the market”; it's much more of a nuanced, “let’s look at the individual sectors, let’s look at the regulation that does or does not happen, the fiscal support that does or does not happen, some of the geopolitical fights that do or do not happen” before we assign what is a good or bad outcome from an election from a market perspective

Lenssen: If we do see a Democratic sweep of the White House and Congress, what policy changes do you think we can expect to be put into effect?

Mills: It is probably the scenario that could have the most sweeping changes in D.C. And so, when you're discussing potentially sweeping changes, that adds to uncertainty. Markets, we're always told, do not like uncertainty. So on the potentially positive side, a continued support to the economy through continued fiscal support is something that markets would like. Having a toning-down of the rhetoric on the U.S. China relationship. I do think a lot of the U.S.-China fight remains; it's not as if that goes away, but it is more predictable, less bombastic. You could have the reversal of tariffs, especially if it was being viewed as supporting the U.S. economy – the market would like that. Things that the market might not like is usually after a major event, a crisis, in the United States, there’s post-crisis regulation and legislation. And I think that would be the “fairness agenda” a Biden administration would pursue. That does include increasing the tax rate on corporations. It would increase tax rates on the top wage earners in this country. You could see investment taxes change. A lot of those things do have a majority or more support among the American people when you look at polling data, so I do think those are fairly to highly likely, and I think that those debates probably take a little bit longer than expected. But the market would certainly start pricing that in if there was a Democratic sweep come November 3.

Lenssen: Ed, one last question for you. What is one takeaway that you have for investors right now as we head into the next few weeks?

Mills: Yeah, I think that's a great question. I think that my takeaway from this market, through kind of the COVID-19 crisis, is that the Fed is really committed to doing whatever it takes, and that has really provided support for this market. And so I think a lot of investors are thinking that the put that the Fed has always assumed to have had on the market continues. I do think Congress needs to provide more support fiscally for the markets to hold in. I do think we get there, but that combination of a Fed put, fiscal support from Congress and the Trump administration is really what the market is looking for if it is going to continue the bounce-back off of March lows. It is never a straight line between here and there, but there is some comfort in the idea that the Fed really is ensuring some level of monetary support to this economy as we go through unprecedented economic times.

Lenssen: Raymond James Washington Policy Analyst Ed Mills. Ed, thank you again for your insights today. We really appreciate it.

Mills: Paige, thank you.

Lenssen: Listeners, thanks for tuning in. You can find us on Spotify and Apple Podcasts, so be sure to subscribe to catch all our latest episodes. For What It's Worth, I'll see you next time.

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