As one well-known economist wryly noted to me in a phone call, “You cannot make this stuff up”.
The stuff he was referring to is the drama playing out on our television screens: an incredibly bellicose first US presidential debate, hesitation by President Donald Trump to denounce white supremacist groups in America, and finally the commander-in-chief testing positive for COVID-19 — after months of downplaying its threat.
Even the most loyal supporters of what remains the world’s number one economy are scratching their heads wondering, what’s next? America, especially the current sitting president, is offering a boatload of uncertainty and the waves keep rolling in.
The biggest fear factor in the past month is the real concern of whether Donald Trump would vacate 1600 Pennsylvania Avenue if it was a tight election, since he continues to cast doubts on the mail-in ballot system that is offered as an option to voters. Understandably during the second wave of the pandemic, voters are showing reluctance to queue in long lines to have their say.
Discount the ride
Investors were rattled, but not panicked by news that President Trump tested positive for COVID-19. His ‘joyride’ to greet voters while under care in Walter Reed military hospital was viewed a dangerous ploy, put down by investors as basically ‘Trump being Trump’. They have grown numb to the not so presidential approach to day-to-day matters.
A widely used narrative that the President continues to feed through his social media channels is that he remains the only leader that can deliver results for both Corporate America and Wall Street. It is true the Republican Party has a reputation for being pro-business, but evidence would suggest that assumption does not square with actual performance of the US economy.
Right there at the start
The one fact that stands out the most for me is that ten of the last 11 recessions began whilst a Republican was in the White House. That was the case during the 2008 global financial crisis, and it rings true during the current pandemic.
How about the general state of the US economy? US based CFRA crunched the numbers going back to the end of Second World War and the economy over the last seven decades has outperformed under Democratic leadership and by a wide margin, 4.1 per cent versus 2.5 per cent.
One would assume that Wall Street would also excel under lower tax policies that the Republican party is fabled for. History also paints a very different picture and again not by a small margin, with 11.2 per cent gains for the broad S&P 500 index in that time frame, comfortably outshining Republican-led administrations, which produced 6.9 per cent annual average returns.
“The market does do better under Democratic presidential control,” Sam Stovall, chief investment strategist at CFRA Research told my colleagues at CNN Business. That performance is even better in the first year of office for a Democrats — with a gain of nearly of over 16 per cent in the S&P 500 since 1945 versus less than a 0.5 per cent for Republicans.
President Trump has deregulated the US economy to give Corporate America freer rein to grow. This was good for corporate profits in the first three years of a Trump administration, but not so beneficial for example to shape climate change policies or for average fuel efficiency in vehicles, with pickup trucks still dominating the landscape.
A recent nationwide poll by the Wall Street Journal and NBC News has former US Vice-President Joe Biden widening his lead to 14 points and may define a turning point, with less than a month until the election. If that plays out in the key swing states, even with a smaller but still decisive margin, this would lift a cloud of uncertainty that has hovered over US markets.
Market can live with Joe
Joe Biden is not seen as the socialist or leftist that Donald Trump tries to define him as on Wall Street. Whether it is a Republican or Democrat in office next year, a harsh reality will set in for the next US President, stimulus driven growth will need to wind down in 2021 as America’s debt to GDP surges past 100 per cent for the first time.
“The bad news is that now we have an even bigger debt crisis and now governments around the world are trying to figure a way to pay for it,” said Darius Adamczyk, CEO of Honeywell. He voiced his concerns during the recent Global Manufacturing and Innovation Summit I chaired ... and he was not alone.
“Every action has a reaction and these actions will catch up with us. These ramifications on growth and on these economies, I think will kick-in in 2021 and 2022,” said Khaldoon Al Mubarak, Group Chief Executive of Mubadala Investment Company in Abu Dhabi.
Taxes and budget cuts will be inevitable and without the added juice to the US economy of record stimulus spending, whoever occupies the White House will face a monumental challenge for the next two years.
— John Defterios is Emerging Markets Editor at CNN.