MIKE TOWNSEND: Two weeks ago, the president announced that he had tested positive for COVID-19. Since then, he was hospitalized, underwent experimental treatment, was released from the hospital, quarantined in the White House, sent more than 300 tweets, made several videos, held a public event at the White House, and now has returned to the campaign trail.
While all that was happening, there were multiple stops and starts to economic stimulus negotiations on Capitol Hill, a debate between the vice presidential candidates, the cancellation of a debate between the presidential candidates, and the start of confirmation hearings for the nominee to the Supreme Court, just to mention a few highlights.
What are investors to make of it all?
Welcome to WashingtonWise Investor, an original podcast from Charles Schwab. I’m your host, Mike Townsend, and on this show, our goal is to cut through the noise and the nonsense of the nation’s capital and help investors figure out what’s really worth paying attention to. Coming up, I’ll take a shot at breaking down what these recent developments mean for the election, for the debates, for the prospects for more stimulus—and for the markets.
In just a few minutes, I’ll be joined by Jeff Kleintop, chief global investment strategist here at Charles Schwab, to help look beyond our borders and assess what the drama and uncertainty in the United States could mean for international investment opportunities.
But first, let’s try to sort through all the big news happening right now. The president’s positive coronavirus diagnosis caused a ripple effect throughout Washington in ways that are still unfolding in real time. Let’s examine the implications across three broad areas.
First, there’s the impact on the presidential campaign. The president lost more than a week of being on the road at a crucial time for his re-election efforts. And while he’s now back on the trail, it’s not clear whether he’ll be able to attract the large crowds that he prefers, given heightened concerns about the transmission of the virus at large events. Early signs this week are that crowds are smaller than they were at events before the president contracted the virus, but that may change as he pushes the message that he recovered quickly from the virus, and therefore risk is pretty low.
But the bigger challenge for the president is that he spent the months of August and September focusing his energy on changing the campaign conversation away from his administration’s handling of the pandemic and toward topics that his campaign feels are stronger ground for him—like the economy and law and order. Now, the coronavirus is virtually guaranteed to be the issue of the final three weeks of the campaign. With nearly three dozen positive cases among White House employees, as well as three Republican senators and a number of other attendees at a White House event in late September also testing positive, it’s going to be more difficult for the president to change the topic. And you can bet the Biden campaign will be doing all it can to make sure the issue stays front and center.
Meanwhile, there’s been some significant movement in the polls. On September 29, the day of the first presidential debate and three days before the president’s announcement of his positive COVID-19 test, RealClearPolitics showed Joe Biden leading with an average margin of 6.1 points in national polling. Exactly two weeks later, that margin was 10 points.
That’s a big deficit this late in a campaign. In fact, it’s the largest polling deficit an incumbent has faced at this point.
So how could the president potentially turn things around? Well, historically, the debates represent some of the best chances a candidate has to influence voters during the home stretch. But this week’s town-hall-style debate, scheduled for October 15 in Miami, was cancelled. The Commission on Presidential Debates, which has organized the debates since the 1988 race, first announced that the debate would be virtual, citing concern for the health and safety of the town-hall attendees in the wake of the president’s diagnosis. When the president balked at that proposal, the two campaigns made alternative plans, and the debate was cancelled. Joe Biden plans to hold a town hall on ABC on October 15 instead, while the president plans to hold a rally. There is still one more debate scheduled to take place on October 22—at least that’s the plan right now.
The second major area of impact is on Capitol Hill. Senate Majority Leader Mitch McConnell announced that the Senate would not meet in full session during the weeks of October 5 and October 12 to allow the three senators who’d also contracted COVID to recover and to ensure that the virus had not spread more widely among senators or Senate staff.
The shutdown of the Senate floor for two weeks probably wasn’t much of a disappointment to the more than 30 senators running for re-election—they were likely happier to be out on the campaign trail.
But it did contribute to the uncertainty around a major issue—legislation to provide another dose of economic stimulus and coronavirus aid. The last couple of weeks have seen a dizzying series of stops and starts in the negotiations between Treasury Secretary Steven Mnuchin and House Speaker Nancy Pelosi.
As October began, it seemed like progress was being made. House Democrats, who originally passed the HEROES Act, an aid bill of more than $3 trillion, back in May had come down to $2.2 trillion. Meanwhile, Republicans, who started out at around $1 trillion in the summer, had come up to about $1.6 trillion. The gap was still wide, and there were several big differences—on things like aid for state and local governments, money for testing and contact tracing, and enhanced unemployment benefits—that needed to be sorted out.
On October 3, the president called for passage of a major aid bill. But three days later, he abruptly announced that he was ending negotiations until after the election. Later that same day, he changed tune again, calling for Congress to pass a narrow bill that included emergency aid for the airlines, $1,200 stimulus checks for American taxpayers, and a few other items. By late last week, Mnuchin and Pelosi were discussing a standalone bill for the airlines—but Pelosi kept to her long-stated preference for a comprehensive bill.
Then Mnuchin returned to the table, at the urging of the president, with a $1.8 trillion offer—which Pelosi again considered to be lacking in several areas. And perhaps more notably, the larger offer produced a backlash from Senate Republicans, who had not been part of the negotiations, and many of whom actively opposed that much spending.
At the end of the day, all of the back-and-forth has resulted in nothing close to an agreement between the two sides, and it now seems virtually certain that there won’t be any stimulus until after the election. But I think there remains overwhelming optimism that another round of stimulus is coming eventually—whether during the November-December post-election timeframe or early in 2021.
The Senate remains the focal point for another issue—the confirmation hearings for Amy Coney Barrett, the nominee for the vacancy on the Supreme Court. Despite the fact that two of the three Republican senators who tested positive for the virus are members of the Senate Judiciary Committee, Barrett’s hearings began in that committee on Monday, October 12, with opening statements. She faced questions on October 13 and 14, with the hearings expected to wrap up on the 15th.
A committee vote is expected next week, and if she is approved as anticipated, that sets up a final debate and confirmation vote by the full Senate during the week of October 26. While nothing in Washington these days is a done deal until it’s actually a done deal, Barrett appears to be on a fast track toward confirmation just before the election.
All of which brings us to my third and final implication: How has this dizzying stream of news affected the markets? Well so far, the markets seem indifferent to the chaos and perhaps even energized by it. Between September 28, the day before the first debate and four days before the president’s diagnosis, and October 12, the S&P 500® rose nearly 5.5%.
It’s another stark example of how the market remains mostly unfazed by what can often feel like a circus atmosphere in Washington. And it’s a reminder to investors not to get too distracted by the election and the politics. At a time when it can seem like the only thing going on is the election, markets are still focused on a wide variety of factors, of which the election and the political disputes in the nation’s capital are just part of a complex equation.
On my Deeper Dive this week, I want to expand our view beyond Washington, and beyond our borders for a few minutes. Jeff Kleintop is the chief global investment strategist here at Charles Schwab, and he joins me today to discuss how our domestic news is playing around the world, what global investors are thinking about the election, and the implications for global markets of possible election outcomes. Jeff, thanks so much for being here.
JEFF KLEINTOP: My pleasure. Thanks for having me, Mike.
MIKE: Well, Jeff, before we get to the U.S. election and its potential impact on global investing, let’s begin with the virus. We seem to be looking at a second wave of COVID-19 cases in other countries, some of which are considering or have already implemented lockdowns. Will a spike in cases around the globe trigger a global recession?
JEFF: A return to national lockdowns and the recessions that would follow would be a very negative development for the markets and the global economy. And we have seen one country reinstitute a national lockdown. But so far, we’ve seen renewed restrictions well short of national lockdowns in places like the U.K. and France and elsewhere. But you know, last week, we saw the opposite of lockdowns in China. The whole country went on vacation. “Golden Week” is an eight-day holiday at the beginning of October where half a billion people travel and visit tourist sites and shop. It’s going to be a big challenge to keeping COVID contained in China, but they haven’t had a new domestically sourced case since mid-August. So there’s hope.
MIKE: As we all know, President Trump contracted COVID-19, as did other senior members of the administration, three Republican senators, and other officials. But he’s not the first world leader to get the virus. What happened when other leaders contracted the virus?
JEFF: Yeah, you’re right. Five other world leaders have tested positive for COVID-19. Now, three of them were from very small countries: Honduras, Guatemala, Armenia. These really aren’t comparable. More comparable was controversial President Bolsonaro in Brazil. In Brazil, Bolsonaro changed his tune on the virus and supported fiscal stimulus plans, resulting in a sustained boost to his polling numbers.
But the most comparable is probably U.K. Prime Minister Boris Johnson. After his Conservative government was initially criticized for not taking COVID seriously enough, Johnson was hospitalized in April for treatment. And his polling numbers saw an uptick, but it was short-lived. The U.K. has lagged on the amount of fiscal stimulus in comparison to the rest of the world. Johnson’s government was later criticized for easing restrictions too soon, with renewed restrictions now recently being put in place to try and tame a rising case count.
So based on this small sample, it seems that if catching COVID led to more stimulus, it helped the leaders’ polling. If not, then any boost faded fast.
MIKE: Well, we’ll have to see how that plays out in the U.S., where we’re still waiting for more economic stimulus. Well speaking of the U.K., Jeff, one of the issues the market has watched carefully for more than four years now is Brexit. We appear to be approaching the end. So what’s next? And what’s at stake for investors and the markets?
JEFF: The risk of a hard “no-deal” Brexit at the end of this year did rise in the last month or so, and that has weighed on U.K stocks and the British pound and even pushed U.K. monetary policy rate expectations into negative territory. But we believe there’s enough room for compromise on the main issues dividing the U.K. and the EU to develop some kind of a small trade deal. As in the past, we expect any resolution to be at the last minute, which could even be later this month. At that time, after having pursued all other options, legal or otherwise, Johnson may accept a deal pretty close to the recent EU proposals, as he did when he signed the withdrawal agreement in October of last year that he and predecessor Theresa May had both rejected several times earlier in the year.
U.K. stocks have fallen by a lot. They’ve declined over 20% this year, sharply underperforming other European markets—for example, German stocks are up this year—and therefore reflect heightened risks. And the British pound has fallen relative to the U.S. dollar this year as well, even as the euro has posted gains. Obviously, failure to agree on a deal would deliver a major blow to the U.K. economic recovery. But at least a portion of these risks seem to have already been priced into the markets, so a last-minute deal may give a significant boost to markets and to confidence in the U.K. recovery. And that could result in a rally in U.K. stocks, and to a lesser extent EU, stocks. It could mean gains specifically in U.K. financial stocks due to lower risk of a reduced marketplace in Europe and negative yields and also a rise in the British pound as the prospects for negative yields fade.
The Brexit endgame may finally be here after more than four years. That means risks for investors have mounted but may now also offer opportunities.
MIKE: Jeff, let’s turn now to the U.S. election and its potential impact on the global markets. First, just give us a sense of what world markets are thinking about this election and the possible outcomes.
JEFF: The market impact of a “blue wave” result for the U.S. election (the Democratic sweep of the White House and both chambers of Congress) is, I think, worth spending some time on for a couple of reasons. For one thing, polls are signaling a rising chance of this outcome. But mainly, because out of all the possible outcomes, a “Blue Wave” implies the largest potential changes to the legislative environment for global companies, which could result in some significant impacts for markets.
MIKE: Well let’s dive into the specifics of that for a minute. I think most investors are very aware that a “blue wave” outcome to the election could usher in an era of higher taxes in 2021 and beyond. While a lot of the focus has been on the potential implications for the individual taxpayer, are the markets focusing more on possible changes to the corporate tax?
JEFF: I think so. Markets may welcome new spending initiatives, and these may be, however, accompanied by higher corporate taxes. A rise in the U.S. corporate tax rate from 21% to 28%, as proposed by Biden, could result in the average company seeing their after-tax profits fall and may put downward pressure on stock prices.
You know, I think it’s worth looking back to 2017 when the corporate tax cuts were passed. U.S. stocks underperformed international stocks in the first, second, and third quarters of 2017. But as the corporate tax cut legislation was introduced, passed, and implemented, U.S. stocks began to outperform international stocks in the fourth quarter and over the following year. The tax cuts took the U.S. effective corporate tax rate from the top to the middle of the pack of peer countries. Now there is a chance that U.S. stocks may underperform international stocks if it appears that those tax cuts are likely to be reversed, lowering after-tax profits for U.S. companies, while tax rates remain stable elsewhere.
MIKE: Well, Jeff, as you and I have discussed many times before, the outlook for taxes in the U.S. is still highly uncertain. Very dependent on the outcome of the election, and then a lot of political developments have to unfold in a certain way to get us there. But I think it’s really important to take a look at that possibility. Another area I wanted to raise with you is what about changes to labor policy in the case of a Biden victory and Democratic control of Congress? How would that impact things?
JEFF: Well, Biden’s top priorities include an emphasis on putting workers before shareholders and restoring labor’s share of national income through empowering unions and bargaining rights. If successful, this could reverse a trend that in recent years has seen U.S. corporate profits rise to make up their largest share of national income in 70 years and labor’s share of national income fall to 70-year lows.
Now, contrasting trends have lifted Europe’s labor costs to their highest as a percent of GDP in about 20 years. This has been a key factor as to why the growth in profits of U.S. companies have exceeded those of European companies over the last decade. But if the trend of falling labor share of income reverses in the U.S., it could act as a drag on the profit growth of U.S. companies relative to their international peers.
So stock markets may initially welcome the potential for more fiscal stimulus (including infrastructure and green initiatives) and maybe the lower tariff risk that may come with a Democratic sweep. But the trade-off could include higher taxes and higher labor costs for U.S. companies relative to their international peers. Looking to portfolios, those outcomes could handicap earnings and market performance of U.S. stocks and lead to relative outperformance of international markets.
MIKE: Environmental policy seems like an area where there will be clear changes in policy direction if there’s a Biden administration in 2021. Are you seeing signs of investors anticipating those changes?
JEFF: Yes. Markets appear to be betting on Biden’s environmental priorities as being one of the biggest changes from the Trump administration. The MSCI Global Alternative Energy Index, full of green stocks, has widely outperformed traditional energy stocks in the MSCI World Energy Sector Index as Biden’s lead solidified over the summer and saw an extra surge, post-debate.
But if the Senate remains in Republican control, the U.S. embracing major climate change legislation in parallel with Europe’s New Green Deal—including climate-related taxes and tariffs on high-carbon products—to me seems unlikely. So since alternative energy stocks have already rallied sharply, there may be risk to those gains if the election doesn’t result in a “blue wave.”
MIKE: Well, you mentioned alternative energy, and I do think energy policy is closely related to the environmental policy. I think a lot of investors are anticipating that a Biden administration would put an emphasis on alternative energies. What do you think will be the impact on the oil market in a Biden presidency?
JEFF: Well, it’s complicated. Biden has said that if he wins, the U.S. would re-enter the JCPOA, the Joint Comprehensive Plan of Action, the agreement negotiated in 2015 to contain Iran’s nuclear ambitions that Trump withdrew from in 2018. The U.S. re-imposed sanctions that greatly complicated Iran’s efforts to export oil, which prompted Iran to resume some of its nuclear activities and halt most of its commitments to that deal. Now, it’s hard to say for sure, given a lot of black-market activity, but Bloomberg estimates that Iran’s oil exports fell by about 90%, reducing the global supply of oil by nearly two million barrels per day.
A return to the agreement, well, that’s got some challenges—including an election in Iran in June of next year that appears likely to result in a hardline conservative government rather than a reformist administration that originally made the deal—and may take some time even if successful. But nevertheless, Biden’s efforts to try to stop Iran from enriching uranium in exchange for dropping sanctions could lead to the markets pricing in an increase in oil supply from Iran, and that could keep a lid on energy prices as demand continues to recover in 2021, limiting the market performance of traditional energy companies.
MIKE: One more big issue that I’d like to get your perspective on, Jeff, and that’s trade. Something I find absolutely unbelievable is the fact that the United States and China signed the “Phase One” trade deal this year—in January of 2020, which now seems like about a decade ago. The relationship between the two nations has deteriorated dramatically since then, so much so that trade kind of feels like it’s been moved to the back burner. Do you think trade—with China or with other nations—will move back to a top priority in 2021?
JEFF: The U.S. has established trade deals not just with China, but with its four biggest trading partners in recent years. There’s Mexico and Canada, of course China, and Japan as well. But we’ve got trade deals with the United Kingdom and European Union on tap for 2021. Biden would likely find more common ground with Europe leading to fewer frictions and a shorter path to a deal, but he might also be slower than Trump to quickly agree to a free-trade agreement with a Conservative U.K. government following the U.K.’s departure from the European Union.
Now, with regard to China, despite the Phase One trade deal, U.S.-China trade tension has not eased and has now extended to specific companies. Biden favors a multi-lateral, rather than unilateral, approach to addressing China—which means a more transparent and slower-moving process to addressing things like the environment and labor standards—the two things that top Biden’s list when it comes to China, above the manufacturing jobs and trade balance that are the main focus of the Trump administration. Biden’s history is one of cooperation rather than confrontation with China as it relates to seeking changes to China’s behavior. The Obama administration’s leadership of the Trans-Pacific-Partnership was a clear example of this.
Now, COVID-19’s been the major driver of stocks in 2020, but prior years have been heavily influenced by the outlook for trade. The potential for a less confrontational stance combined with a multi-lateral approach could mean less overall market volatility tied to trade and specifically for the companies dependent upon operating in both the U.S. and China.
MIKE: Jeff, this has been a great dive into some of the key issues at stake in next month’s election. So final question: What should investors interested in international opportunities be thinking about?
JEFF: Well, history shows that it’s usually the case that the market and the economy have more of an impact on the outcome of the election than the election outcome does on the markets and the economy. But there are some potential impacts from a “blue wave” that are worth considering.
The stock markets may welcome the potential for more fiscal stimulus and lower tariff risk that may come with a Democratic sweep, but the trade-offs could include higher taxes, higher labor costs, and maybe a tougher and more costly regulatory environment for U.S. companies relative to international peers—not to mention the legislative risks for the largest two U.S. sectors (tech and health care). That could lead to better earnings and market performance by international stocks after they’ve lagged in recent years.
MIKE: Well, Jeff, terrific advice as always. Thanks so much for joining me today.
JEFF: Always a pleasure, Mike.
MIKE: That’s Jeff Kleintop, Schwab’s chief global investment strategist. You can follow Jeff on Twitter @JeffreyKleintop and also read more from him on the Insights section of Schwab.com.
Before we wrap up today, I want to take a few minutes to give an update on the part of the election that I’ve been saying for months is the most important for investors to watch—the battle for control of the Senate. We just talked about the “blue wave” scenario with Jeff Kleintop, but that only comes into play if Democrats can win the majority in the Senate on November 3. So how likely is that outcome?
As a reminder, the current count is 53 Republicans and 47 Democrats, including two independent Senators who caucus with the Democrats. There are 35 Senate seats up for election this year—23 are currently held by Republicans, and 12 are currently held by Democrats.
For Democrats, there are only two Senate seats that seem to be in any kind of danger. In Alabama, the Democratic incumbent, Senator Doug Jones, is trailing in his re-election bid in a state that traditionally runs very red. The Republican challenger, former Auburn football coach Tommy Tuberville, is favored to turn that seat from blue to red.
In Michigan, incumbent Democratic Senator Gary Peters finds himself in a tightening race but has maintained a consistent lead in the polls. He’s favored to win re-election, but I’m keeping one eye on this race in the final three weeks.
Beyond those two states, Democrats seem likely to win re-election in the rest of their Senate races.
On the Republican side of things, however, there are at least 10 races that are shaping up as very close. In Arizona and Colorado, polling has consistently showed the Democratic challenger ahead, and many pundits expect both those seats to flip to the Democrats.
From there, Democrats are looking to flip at least two more seats from a list of close races in states like Iowa, Maine, Montana, and North Carolina. And polls show a virtual tie between Senator Lindsey Graham, the Republican from South Carolina, and his Democratic challenger, Jaime Harrison, who raised an astonishing $57 million in the third quarter. That’s the most ever raised by a Senate candidate in a single quarter, beating the previous record by nearly $20 million.
Finally, there’s an unusual situation in Georgia, where there are two Senate seats on the ballot this year—one for a regular six-year term, and the other is a special election to complete the remainder of the term of a senator who resigned at the end of 2019 due to health issues. Both races are very close.
In Georgia, if no candidate attains more than 50% of the vote on Election Day, then the top two candidates go to a run-off election. It’s possible that both races could go to a run-off, but it’s almost certain that the special election race will go to a run-off because there are multiple candidates running. Georgia’s run-off election is January 5—which is after the new Congress is sworn in on January 3 and the day before Congress meets to ratify the Electoral College results. If you want to imagine a crazy scenario, imagine if one or both of those Georgia races are critical to determining which party will hold the majority in the Senate.
We’ll see if that happens. For now, Democrats appear to have the momentum to capture the Senate, but it’s far from a certainty. I expect many of these Senate races I mentioned to be very close—and it could be days or even weeks after the election before we know which party has the majority. As I said a moment ago, that may be the most important result for investors to follow in November.
Finally, on my Why It Matters segment, I highlight something you may have missed and why I think it’s important to investors. On October 6, Democrats on the House Judiciary Committee released a 449-page report on the anti-competitive behavior of Amazon, Apple, Facebook, and Google.
The report is the end product of a 16-month anti-trust investigation, and it was scathing. Two key lines from the report: “These firms have too much power, and that power must be reined in and subject to appropriate oversight and enforcement. Our economy and democracy are at stake.”
Why does this matter? Well, we all know how well some of these big tech stocks have performed in 2020. But if Democrats sweep the White House, the Senate, and the House in next month’s election, then 2021 could be a tough year for these companies. They will be under heavy regulatory scrutiny and potentially more government pressure than they have ever faced before. There are additional investigations underway at the Federal Trade Commission and the Justice Department. And all of that could have implications for shareholders.
Now, we’re far too early to know exactly how this will play out—it’s a process likely to unfold in 2021 and beyond. Changes are many months, maybe years, away. But for investors, many of whom are invested in these companies either directly or through mutual funds and exchange-traded funds, it’s something that bears watching.
That’s all for this week’s episode of WashingtonWise Investor. We’ll be back with a new episode in two weeks.
Please take a moment now to subscribe so you don’t miss our next episode, as we continue to follow the election and other stories that may impact the markets and your portfolio. And if you like what you’ve heard, leave us a rating or a review on Apple Podcasts or your favorite listening app—those ratings and reviews really do matter.
For important disclosures, see the show notes or Schwab.com/WashingtonWise, where you can also find a transcript.
I’m Mike Townsend, and this has been WashingtonWise Investor. Wherever you are, stay safe, stay healthy, and keep investing wisely.