MIKE TOWNSEND: Congress acts with remarkable speed to make federal funds available to combat the coronavirus. … The Federal Reserve stuns the markets with its biggest rate cut in 12 years. … The presidential field is drastically smaller than it was just 10 days ago. … And former Vice President Joe Biden resurrects his campaign with a surprising Super Tuesday performance. Those are just a few of the headlines from this past absolutely astonishing week.
Welcome to another episode of WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this program we try to cut through the noise and the nonsense of the nation’s capital and figure out what really matters to investors and the markets. This week, we have a lot to sort out. I’m going to break down the key events of a week that saw extraordinary market volatility, highlight a couple of things that you may have missed along the way, and explore the dramatic reshaping of the presidential race and its potential implications for the rest of the campaign season and the markets. But let’s begin with a look at the stories making news right now.
There’s no question that the biggest one is the spread of the coronavirus in the United States and the anxiety it is producing. We are seeing significant volatility in the markets as investors sort through the news and react—perhaps overreact—to the developments as they happen. We are also seeing Washington step up its response after some criticism that officials were not taking the outbreak seriously enough.
Then, in an attempt to get ahead of the coronavirus’s impact on the economy, the Federal Reserve slashed the benchmark interest rate by 50 basis points, to a new range of 1% to 1.25%. It was a move that seemed to catch the markets off guard—maybe not the timing but the size of the cut. The Fed had not made a move of more than 25 basis points in either direction since the financial crisis in 2008.
There was a significant market reaction to the downside on the day the cut was announced, as some investors interpreted the move as a signal from the Fed that perhaps the economic impact from the virus could be more negative than was previously thought. Some investors are also concerned that the Fed has used up too much of its so-called “ammunition” and won’t have enough left if the economic impact worsens. Treasury yields of all maturities dropped after the decision, with the 10-year Treasury dropping below 1% for the first time ever.
While the Fed’s move cannot directly address the outbreak, the aim is to help mitigate some of the secondary effects—and the Fed clearly wanted to signal that it is on top of the situation and willing to quickly offset some of the risks.
We’ll get more perspective from the Fed next week, when the Fed’s Open Markets Committee gathers for its regularly scheduled meeting on March 17 and 18. Fed Chair Jerome Powell will address the media after that meeting—and the markets will undoubtedly be listening carefully to what he has to say.
Is it possible the Fed could cut rates further at that meeting? Well, The Wall Street Journal noted that, prior to last week’s move, the Fed had cut interest rates in between its regularly scheduled meetings just six times since 1998. On all six occasions, the Fed further lowered rates at its next policy meeting.
My colleague Kathy Jones, the chief fixed income strategist at the Schwab Center for Financial Research, is a terrific resource for more perspective on the Fed’s actions. She has a great article entitled “After the Fall: Why You Should Hold Bonds Even When Yields Are Low.” The easiest way to find it is to hover over the Insights tab on schwab.com and click on the Fixed Income link under Insights & Ideas. And I highly recommend you follow her on Twitter @KathyJones. And finally, Kathy will be my guest on the next episode of WashingtonWise Investor, just after the upcoming Fed meeting.
Now the Fed wasn’t the only Washington institution responding to the coronavirus outbreak. Last week also saw a bipartisan effort in Congress to approve an emergency spending bill. After several days of talks, Congressional leaders were able to hammer out the details of a bill that will put about $8.3 billion in federal funds to work combatting the virus. The House passed the bill 415-2 last week, with the Senate clearing the measure by a 96 to 1 vote on March 5.
This package will send $400 million to state and local governments within the next 30 days; allocate more than $2 billion to the Centers for Disease Control, much of which will go to support state and local health agencies that are on the front lines of the response; and dedicate more than $3 billion to beefing up the national stockpile of medical supplies, including masks, respirators, and medicine. And more than $800 million will go to research and production of vaccines, treatments, and tests.
The speed with which that bill moved through Congress—it went from draft form to the president’s desk in under 24 hours—is obviously unusual and, I think, indicative of how seriously lawmakers are taking the crisis.
As you might expect, there’s already a lot of talk in the administration and on Capitol Hill about whether that initial package of funding will be enough, and leaders of both parties indicated that they will supplement that initial funding if and when it is necessary. There’s also lots of discussion going on in Washington about what other economic stimulus efforts could be taken. Many ideas have been thrown around—things like a payroll tax cut or low-interest loans and other breaks for companies whose ability to operate has become affected by the virus—and it’s too soon to tell when or how those ideas might come together. But if there continues to be a serious economic impact, don’t be surprised by even more stimulus coming from Congress.
Finally, I do think the administration recognizes how important it is to get this response right and how critical that may be to the president’s re-election chances. With Vice President Mike Pence now coordinating the federal response, the pressure is on for the administration to improve communication with citizens and respond quickly and directly to developments. With an election eight months away, the administration knows this is a huge test.
We are already seeing other parts of the government react to the outbreak. Last week, for example, the SEC eased some of its rules around filings for public companies, allowing companies to delay by up to 45 days certain disclosure obligations if the company in question has been impacted by the virus. Companies would need to disclose why the relief is needed in a summary report. Expect to see more of these kinds of steps by different parts of the government in the weeks ahead—steps that reflect the reality that some companies may be more impacted by the virus than others, depending on their line of business, their geographic location, and other factors.
Overall, this coordinated response in Washington seems like a positive development. But I think everyone recognizes that we are at the front end of the coronavirus outbreak and that we are likely to see more response from Washington in the weeks ahead.
On my Deeper Dive this week, I want to explore the extraordinary developments in the presidential race over the last ten days, what to expect going forward, and how investors should be thinking about the election.
If we go back just two weeks, it seemed like the race was settling into a particular narrative. Vermont Senator Bernie Sanders had scored a big win in the Nevada caucuses and opened up a small lead in the delegate count. Former Vice President Joe Biden had just had his third consecutive disappointing performance. His campaign was running out of money and running out of enthusiasm—Biden’s political obituary was being written. None of the other candidates then in the race seemed to be gathering much momentum. And many observers were looking at Michael Bloomberg, the former New York City mayor, who was not competing in the first four states and had instead injected hundreds of millions of dollars of his own money to target Super Tuesday states with an avalanche of advertising and an extraordinary campaign infrastructure of offices and workers.
Then came February 29, and everything flipped on its head.
Polls showed that Biden would win the South Carolina primary, but few observers saw a blowout win coming. Biden defeated Sanders by nearly 30 points, re-energizing his campaign. Biden’s win propelled him into second place in the delegate count behind Sanders. Perhaps more importantly, it acted as a catalyst to dramatically reduce the field.
First, billionaire environmentalist Tom Steyer announced he was ending his campaign on February 29, hours after the polls closed in South Carolina. He had staked his campaign on a strong performance in that state, where he had spent the most time and the most money, but he finished a distant third.
The next day, March 1, former South Bend, Indiana, Mayor Pete Buttigieg, who had won a narrow victory in the Iowa caucuses less than a month before, announced that he would end his campaign.
And on March 2, Minnesota Senator Amy Klobuchar also dropped out of the race. Both Buttigieg and Klobuchar endorsed Biden. Suddenly, after months of speculation that a split among the so-called moderates in the race would hand the nomination to the more progressive Sanders, we saw a coalescing of the moderate wing of the party behind Biden.
And that brought us to Super Tuesday, when 14 states all went to the polls at the same time—the biggest day of the campaign so far.
To put Super Tuesday in perspective, the first four states—Iowa, New Hampshire, Nevada, and South Carolina—together handed out about 4% of the delegates available in the race. On Super Tuesday, about 34% of all the delegates in the race were available.
The upshot of last Tuesday’s voting: It’s “game on” for a two-man race.
Joe Biden had a big night, winning 10 states, but Bernie Sanders won the night’s biggest prize, California.
It’s important to note that we still don’t know what the final delegate counts from last week’s voting will be—it takes a while to allocate those delegates, especially in states like California, where counting all the votes can take a week or more.
But it’s clear that Biden and Sanders will be neck-and-neck coming out of Super Tuesday—and right now, Biden appears to have a slight advantage.
I think the most interesting aspect of Super Tuesday was how quickly Joe Biden was able to rally support, particularly in states where he had barely visited and had only the most simple of organizations. In fact, The New York Times reported that on Super Tuesday, Biden had a total of only nine offices in the 14 states that were voting that day.
It was not surprising that he won states like Tennessee and North Carolina and Virginia—he was always going to do well in the south. But he also won Texas, which a lot of people did not think would happen, and he won in Maine and Massachusetts and Minnesota, which few analysts expected. That broader appeal, across a variety of states demographically and geographically, was a significant development.
And I think it gives his supporters confidence that he can perform well in some of the upcoming states like Michigan and Ohio.
Sanders did well in states with large Latino populations and with younger voters, winning California, Colorado, and Utah, as well as his home state of Vermont. He is by no means out of it. Because of the way delegate allocation works, both Biden and Sanders won significant numbers of delegates in states where they came in second. In Texas, for example, Biden won about 34% of the vote and Sanders won about 30%.That means that each will get a significant number of delegates—in fact, it appears that Biden will earn 111 delegates from Texas, while Sanders will earn 102. That’s a win for Biden, but he only secured nine more delegates.
In California, where Sanders’ margin of victory looks to be around nine points, he’ll get a somewhat higher percentage of the delegates—and that will keep the overall delegate count coming out of Super Tuesday very close.
And of course the other big development on Tuesday was the complete flop by Michael Bloomberg, who spent nearly $600 million of his own money and won only a handful of delegates. On the morning after Super Tuesday, Bloomberg suspended his campaign and endorsed Biden—an incredible end to his effort.
But even though he is no longer running, don’t underestimate the impact Michael Bloomberg can and will have on this race going forward. He has pledged to continue to spend enormous sums of his personal wealth to support whoever wins the Democratic nomination. And he plans to turn over his massive organization of state offices and employees to the winner. If some of those resources go to Biden in the weeks ahead, it will help bolster the former vice president’s relatively paltry infrastructure around the country.
Finally, on March 5, Elizabeth Warren ended her campaign but did not put her support behind any candidate.
So what’s next? Well, the race doesn’t slow down much at all.
Today, March 10, voters are going to the polls in six more states, including Michigan, Missouri and Washington State, along with Idaho, Mississippi and North Dakota. Michigan is, of course, one of those swing states that gets so much attention on Election Day, so the primary results there will be important to watch.
And just a week from today, on March 17, four really important states vote: Arizona, Florida, Illinois, and Ohio. There are a lot of delegates at stake that day.
By the time we get through next week’s voting, about 65% of all the delegates will have been allocated. But there‘s still lots of other states yet to vote—Georgia at the end of March, New York and Pennsylvania at the end of April, and the final states don’t cast their ballots until early June.
So the logical question is—what does this all mean for investors?
Well, remember, we remain a long way from determining the nominee. I expect this race to continue on for months—perhaps all the way to the Democratic National Convention in July.
And that means there are just too many unknowns right now for investors to be making any investment decisions based on the election outcome.
I’ve been getting a lot of questions at my client events around the country about the potential impact if this candidate wins or that candidate wins. And while I always hesitate to attribute a move in the market to any single factor, it certainly has been the view of a lot of analysts that the March 4 gains in the stock market were at least partly influenced by the Super Tuesday results—basically, that the market would prefer a Biden nomination over a Sanders nomination.
The simple reality is that the policy proposals of Bernie Sanders during this campaign are bigger in scope than the policy proposals of Joe Biden. The market may worry about big changes under a potential Sanders presidency and perhaps sees fewer big changes coming under a potential Biden presidency.
But we are far from figuring that out. We have a very tight contest for the Democratic nomination that may not be resolved for two or three more months.
Then the nominee will face a months-long, bitterly fought general election campaign against the president—and the outcome of that is obviously unknowable today.
But just as important as the outcome of the presidential race is the battle for control of Congress. And from a policy perspective, I’d argue that’s almost more important. Because regardless of who wins the White House in November, his ability to push forward his policy agenda is almost entirely dependent on what happens in the elections for the House and the Senate.
Now in the House of Representatives, Democrats hold a pretty big advantage—the current count is 232 Democrats, 197 Republicans, and one Independent—and there are five vacancies that will be filled in special elections later this year. Right now, Democrats are favored to retain their majority in the House after November’s elections, but the presidential match-up will undoubtedly have an influence on that.
As I said in my election preview episode last fall, most eyes are on the Senate. I think that this is the part of the election that is not getting the attention it deserves, and that still holds true.
Republicans currently hold a 53-47 majority in the Senate. In November, 35 Senate seats are up for re-election. Twenty-three are held by Republicans, and 12 are held by Democrats. But of the 23 Republican seats, 18 are in states that President Trump won by 10 or more points in 2016—in other words, very red states. That means they are long shots for any Democrat to win. Not impossible—for example, in Montana, a state that supported President Trump in 2016 by more than 20 points, Democrats got some news recently that bolstered their hopes for an upset in a red state.
In recent days, the word is that former Montana Governor Steve Bullock, who briefly was a candidate for the Democratic presidential nomination last fall, is reconsidering his long-standing insistence that he would not challenge incumbent Senator Steve Daines, a Republican. While Bullock would have a tough race against Daines, he has won statewide as a Democrat before, and it certainly makes that race more competitive.
But generally, the number of toss-up Senate seats that are in play is pretty small. And that leaves a very narrow path for Democrats to win the majority—they have their eyes on seats in Arizona, Colorado, Maine, and North Carolina, all of which should be very close races.
And some Democrats think they have a shot in Georgia this fall. Georgia has an unusual situation. Because of the resignation of Senator Johnny Isakson at the end of 2019 for health reasons, both Georgia Senate seats are up for election this November. And Democrats think they might be able to take advantage of that situation to perhaps pick up one of the two seats in Georgia.
Democrats’ chances for winning the Senate are complicated a bit by Alabama, where a Democrat, Senator Doug Jones, won a special election in December 2017. But Jones is up for his own full term this fall, and Alabama remains a very red state. Pundits favor the Republican to win that seat.
So it’s a narrow path for Democrats to win the Senate—not impossible, but narrow.
If Republicans manage to retain their majority in the Senate, and Democrats retain their majority in the House, then no matter who wins the White House, he will be facing a split Congress. And that is likely to act as a significant brake on any major policy proposals the president has in mind.
This is really the important part—no matter who wins the presidency this fall, that person can’t wave a wand and make all of his campaign policy plans come true. There is an enormous gulf between a campaign proposal on paper and a piece of actual legislation that can pass both chambers of Congress.
And even if Democrats were to win a narrow majority in the Senate in November, there is not unanimity among Democrats on some of the policy proposals put forward by either Bernie Sanders or Joe Biden. So it will still be very difficult for a Democratic president, if he wins the office, to get all those ideas through Congress.
The point is—there are so many unknowns right now about how this year will shake out that it’s really impossible to know what the market impact will be when the outcome is finally decided.
Over the past few weeks, I’ve traveled around the country talking to investors, from Atlanta to Phoenix to Ohio to New Jersey. And I’ve received a lot of questions about the various proposals of a particular candidates, such as a wealth tax or a financial transaction tax or plans to crack down on financial institutions or overhaul the health care system. But it’s far too early to tell whether the political dynamics will exist in 2021 that could bring those policies into reality.
The political environment will sort itself out in the months to come, and there will be plenty of time for analyzing policy outcomes down the road. For now, investors should not be making any moves based on a possible election result eight months in the future.
In my Why It Matters segment, I take a look at a story you may have missed and tell you why I think it is important for investors. This week, I want to fill you in on a decision made by the SEC last month. The regulator rejected the latest application by an asset management firm to launch the first Bitcoin exchange-traded fund. Over the past couple of years, a number of firms have put forward proposals to create an exchange-traded fund in the cryptocurrency space. This is an important moment for the industry, because cryptocurrency enthusiasts know that the industry would benefit from the sort of “Good Housekeeping Seal of Approval” that would come if and when the SEC approves the first Bitcoin product to the mainstream marketplace—something that might attract ordinary investors.
But the SEC, particularly Chair Jay Clayton, has consistently expressed concerns about whether any cryptocurrency product is an appropriate investment for the ordinary investor. There’s a lot of concern about the risk of fraud and manipulation and about the volatility and stability of cryptocurrencies.
In the proposal that the SEC reviewed last month, an asset management firm paired with one of the exchanges to propose a fund that mixed Bitcoin with short-term Treasury bonds. The proposal included Treasuries in order to offer some protection against the volatility of the Bitcoin market, which has long been a concern for the agency. Still, the SEC rejected the proposal, as they have other proposals before this one, which I think is a clear indication that cryptocurrency remains a long way from winning much regulatory approval.
Interestingly, the decision was not unanimous. Commissioner Hester Peirce, who has earned the nickname “Crypto Mom” due to her support of the industry, dissented and blasted her colleagues, saying that she has concluded that “no filing will meet the ever-shifting standards that the Commission insists on applying to Bitcoin-related products.”
For now, at least, it appears to be true that cryptocurrency products won’t receive the blessing of the regulators in Washington. But that doesn’t mean that the industry won’t keep trying, so expect to see another attempt to get the SEC’s approval not too far down the road.
Finally, let me wrap up with an update about the two vacancies on the Federal Reserve Board of Governors, which is supposed to have seven governors but currently just has five. The president’s nominees recently went through their confirmation hearing before the Senate Banking Committee. As expected, one of the nominees had no trouble at the hearing. Christopher Waller has been a long-time economist at the St. Louis Fed. He’s widely expected to be easily confirmed to the slot, and his performance at the hearing did little to raise any red flags or concerns.
But the other nominee had a rougher ride at the hearing. Judy Shelton is an economist, an informal advisor to President Trump, and the former U.S. executive director of the European Bank for Reconstruction and Development. She was pressed by members of both parties to respond to questions about a series of controversial statements and views from her past. And after the hearing, three Republican senators expressed serious reservations about voting to confirm her. Since Republicans hold a narrow 13-12 majority on the panel, it seemed clear that she could not be confirmed, and there was considerable speculation that the White House might just pull her nomination.
Now, a few weeks later, the momentum may be changing. Two of the three Republicans who had been critical of her appear to have had their concerns allayed by responses Shelton offered to written questions. And it suddenly seems possible that Shelton could be confirmed and then move on to a final vote on the Senate floor, all within the next few weeks. Nothing is official yet, and she still may fall short of confirmation, but it’s a significant development nonetheless. Given the important role the Fed is likely to play in our economy over the remainder of 2020, the possibility that one or two new voices will be joining the Fed decision-making process is certainly worth following.
Well, that’s it for this edition of WashingtonWise Investor.
Thanks for listening. If you like what you’ve heard so far, please consider leaving us a rating or a review in Apple Podcasts or your favorite listening app. Those reviews and ratings really do matter, as they help other listeners find our show. We hope you’ll subscribe and listen to our next episode, too. You can expect it in two weeks.
For important disclosures and a transcript, see the show notes at schwab.com/washingtonwise.
I’m Mike Townsend, and this has been WashingtonWise Investor. Until next time, keep investing wisely.