Someone has to win

Note: Due to vacation schedules, this week’s column was written August 1.

Joe Biden is a lame duck, which might cause him to retreat from his ambitions. Just as plausibly, he may redouble his efforts to stimulate the economy in what time he has left, seeking to solidify his legacy with a Kamala Harris victory. What might a Harris administration look like? Probably pretty similar to the Biden administration. In the 2020 Democratic primary, she ran to Biden’s left on fracking, Medicare, guns and other issues. In the Senate she had a very liberal voting record and as California Attorney General she pursued cases against fossil fuels, banks and health care firms, so there is some potential for leftward movement. Might her administration pursue a more robust antitrust agenda than Biden’s? It’s not clear she could, for the simple reason that Federal Trade Commission and Justice Department are already being pushed back by the courts. (Interestingly, J.D. Vance has been in favor of antitrust regulation.) Harris has been seeking the support of business, which suggests she would not wish to govern from the far left. Still, investors will want clarity about her views on capitalism, business and profits. A second Donald Trump administration offers some uncertainty as well. Would Trump, could Trump really enact the full set of tariffs he has proposed? Also, how far would he, could he go with regard to border enforcement and trade policy? Taken together, Trump policies on these three issues could have significant effects on inflation and growth, while a Trump presidency would likely mean deregulation and no tax hikes. And which candidate do you want to preside over an increasingly volatile geopolitical landscape?

With US government debt now at 108% of GDP versus 84% in 2018 and just 42% in 2008, you might think one of these presidential candidates would make debt reduction a top priority. Or at least mention it! The Congressional Budget Office says that extending Trump’s 2017 tax cuts that are due to expire in 2025 will add $4 trillion or so to the debt over the ensuing decade. Part of the shortfall could be offset by extending the state and local tax deduction cap. Some of those tax cuts—especially the decrease in the corporate rate—have surely contributed to the strong growth we’ve seen (Covid aside) in the intervening years. Harris might let the cuts expire or at least impose income limits while raising the corporate tax rate. She would likely blunt any savings by restoring state and local tax deductions. Over the long term, the path away from a debt crisis requires big boy/big girl reform of the main entitlements, Social Security, Medicare and Medicaid. I’m not holding my breath. Trump promises 10% across-the-board tariffs along with 60% tariffs on Chinese goods. Presidents have significant leeway on tariffs but not an entirely free hand. Because it’s not tied to another country’s trade manipulation, the 10% tariff on all goods would probably be met with a court challenge. Trump would be more likely to succeed by imposing targeted tariffs, particularly if he certified that national security was at stake or that the foreign country in question illegally subsidized its exports. As a senator, Harris also situated herself apart from the free traders (albeit for different reasons than Trump), registering opposition to both Obama’s Trans-Pacific Partnership and Trump’s US-Mexico-Canada Agreement on labor and environmental grounds. With regard to legislation more broadly, in case of divided government (a currently likely outcome), the next administration will need to decide whether or not to seek compromise. In the polarized climate of recent years, it has been common for presidents to pass what they can when their party controls Congress but otherwise accept a modest legislative agenda.

Trump has held leads in the swing states of the Sun Belt (Arizona, Nevada, Georgia). Harris will want to put these into competition while maintaining strength in the swing states of Pennsylvania, Michigan and Wisconsin. With Biden out, the odds of a Republican sweep have now fallen and the presidential betting odds have reset to about the same level as before the debate. The entry of Harris into the race might prompt more Gen Z turnout than would otherwise have been the case. In 2020, voters 18-24 were only two-thirds as likely to vote as those 65-74. Also of note: women outnumber men and vote at higher rates too. Will Harris’ gender and the abortion issue prompt more women to vote Democratic than otherwise? Voters worldwide have punished incumbents for the post-Covid inflation spike even though the inflation rate has now mostly retreated. Furthermore, manufacturing contracted globally post-Covid, and much of US manufacturing is concentrated in Pennsylvania, Michigan and Wisconsin. Piper Sandler says that of the five economic signals it looks at to project the fate of the White House, only one—poverty—looks good for Harris. Further down the ballot, the Senate looks likely to go to the Republicans whereas the House is somewhat more up for grabs. A Republican sweep, then, is possible whereas a Democratic sweep is less likely. So-called “double haters,” or those who dislike both candidates, have fallen significantly in recent weeks. It’s a matter of opinion as to why.

Because they are tightly linked to global exports and would suffer from a trade war, European stocks have been rising and falling inversely to Trump’s odds. By contrast, the Magnificent Seven have been trending in and out of favor with Trump perhaps because he has said he would jettison Biden’s restrictions on AI. Now that Harris’ entry has tightened the race, we may see the “Trump trade” partly unwind unless the rotation was not driven mainly by political events anyway. Given Harris’ former support for Medicare for All, managed care companies might struggle if she appears likely to win. A Trump win would likely lead to more drilling though given currently high rates of US production it’s not clear how much more is even possible. Cheaper energy would tend to dampen inflation and bolster growth. If Trump wins, Financials should prosper, thanks to more M&A, a steeper yield curve and less regulation. More generally, value stocks including Energy and cyclicals should outperform following a Trump win. Electric vehicles and green technology more generally would stand to benefit from a Harris win. In the end, the market will respond more to economic data than polling data. The S&P rose more than 21% in the 12 months after Trump’s surprise 2016 win. Despite those sizeable gains, though, sector and factor leadership related to a Trump trade only lasted a month. An unprecedented election year, but someone will indeed win. And then what?

What Else

Deficits retreat for now The federal deficit reached a peak in February and is decreasing now both in absolute dollars and as a percentage of GDP. Why? Strategas think that discretionary spending is flattening out as are entitlements thanks to decreases in the inflation rate, while tax revenues may be underestimated.

Changing patterns of voting In 2020, which of course was an unusual year due to Covid, 54% of voters cast their ballot in person versus 46% who voted by mail-in or absentee ballot. Half of the in-person voters voted early, while the other half voted on Election Day. Voting in person on Election Day, then, was something only about a quarter of voters did.

Having a ball Whoever wins, it’s almost certain that there will be numerous inaugural balls held next January. The tradition dates back to George Washington, though there have been several presidents not to be so honored—Joe Biden among them, due to the pandemic. The first big inaugural ball in Washington, D.C., came in 1809 when Dolley Madison threw a ball for her husband James at Long’s Hotel, ticket price: $4 each.