David Rosenberg: With U.S. economy in disarray, a Democratic sweep could spell more trouble for markets
At some point after Labor Day, the U.S. election will take centre stage. I was stunned to see, over the weekend, a Quinnipiac poll showing Donald Trump behind Democratic rival Joe Biden in Florida by 13 points. A Wall Street Journal/NBC survey also showed 50 per cent of the electorate indicated they will not vote for the President under any circumstances, versus 37 per cent for Biden.
The latest U.S. elections roll around as the economy is clearly in disarray.
As of mid-July, 55 per cent of the 132,500 U.S. business closures on Yelp, a crowd-sourced review website, have now shown to have been permanent.
Restaurants and retail are clearly the hardest hit. Flight and hotel reservations are now being cancelled at peak season, while bars are being forced to close again, even in Las Vegas. Data from OpenTable reveals that restaurant activity has tapered off following a brief burst of demand in May and June.
And the labour market is cooling off in a material way — not just the hooking-up in initial jobless claims (and right in the same week that the payroll survey was taken), but the work I have gleaned concludes that the Payroll Protection Program boosted employment between 1.4 and 3.2 million in May and June.
This means that this temporary, or maybe not-so-temporary, program was responsible for half the job gains in the past two months — that had the stock market bulls in a tizzy.
And we have the added data from the Weekly Census Bureau that shows that employment has declined since the June U.S. jobs report. Someone in the consensus forecast is actually calling for a one million setback in the payroll number that comes out on Aug. 7. Hold on to those long U.S. Treasuries!
Data from Homebase, which tracks hours and schedules for local businesses and employees, supports the thesis that the jobs recovery is stalling. This is a shocking statistic: five per cent of small businesses have already been forced to close down again due to the COVID-19 resurgence — reportedly taking small business employment back to the level it was at the end of May.
The risks of a fiscal cliff, big or small, are coming our way as the Senate Republicans pull off their version of (U.S. President) Herbert Hoover. No doubt we will see something, but apparently nothing close to the House bill that calls for US$3.5 trillion of “stimulus” — the Senate seems set for something closer to US$1 trillion.
In a world of second derivatives, “reduced stimulus” is the same thing as “fiscal drag.” As an example, the GOP senators want to limit the coronavirus boost to unemployment benefits to US$100 per week, from US$600 per week currently. Let’s do the math. There are about 30 million Americans receiving jobless benefits — so the reduction in fiscal assistance would amount to a total cut in aid of US$60 billion per month. That isn’t small.
Eliminating the US$600 supplement could result in large spending cuts. It also says something that it’s the people who got displaced from their jobs during this pandemic who were keeping the economy afloat.
Amid this backdrop, a Democratic sweep could well happen in November. The polls are leaning that way, for what that’s worth. And history also says the odds are very close to a toss-up. The impact on the markets would be negative and the real question is how much.
Biden presumably would not want to rock any boats if the economy is still weak and fragile, but staying the course in Year One doesn’t mean much at all. Donald Trump had to wait more than a year to get his tax cuts through. Along the way, the power of presidential veto allowed for a series of deregulation moves that surely will be reversed if we see a political shift in November. This alone can negatively influence “animal spirits” and hence the price-to-equity multiples even if tax changes are delayed.
But delayed is not cancelled and the future will be higher tax rates on capital and top marginal personal rates. The theme under Democratic rule will be mean reversion in terms of the capital-to-labour ratio and in the Gini coefficient (extreme income — and wealth — disparities). Of course, there is also the strong prospect of breaking up the Big Tech/telecom/consumer discretionary companies that have become oligopolies.
Think of the break-up of the Bell System (under Ronald Reagan) in 1982 as a template and of the power of the U.S. Justice Department.
The sectors most negatively affected from a clean sweep by the Democrats in November would include Big Tech, luxury retailers, defence, biotech and pharmaceuticals, fossil fuels, banks and insurers.
Sectors that could benefit include anything that’s remotely close to the climate change file, discount retailers, Medicaid and managed care/hospitals, small manufacturers and cannabis producers.
Keep in mind that investors are always skeptical at the outset about adventurous left-leaning Democratic presidents — but in the end, the stock market performance isn’t all that bad. The market rose an average of 15.2 per cent each year under Bill Clinton, and 13.8 per cent in the Barack Obama years.
Financial Post