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This week: Markets and election; Swing states; Reading list.
Markets and election
With seventy-six days left to Election Day, Joe Biden is polling comfortably ahead of Donald Trump. But Trump could still prevail for these reasons:
1) There is enough time for a reversal in the polls. At this juncture, many independents are still undecided and are therefore invisible in the polls. Races are known to tighten in the final weeks or even days of a campaign when a significant portion of the electorate finally make up their minds.
2) Nationwide polls of a thousand or a few thousand people are not reliable indicators because of the divergence between the popular vote and the Electoral College, as Hillary Clinton supporters remember sorely. A 5 to 10% lead in the popular vote may mask a tighter or even an opposite reality in the Electoral College tally.
3) Some people are wary of pollsters and of the media in general and are not willing to be polled.
Under any likely election scenario, the stock market which is now at or near its all-time peak is due for a retreat. The main question is whether this retreat will be of 10% or 20%. Because the House will likely keep its Democratic majority, we only consider here the outcomes of the presidential and senate votes:
>>> Biden wins, Senate turns Democrat: Near-term: This would be the most negative near-term scenario for the markets. The new administration would be able to repeal Trump’s tax cuts and to enact tax increases across the board. There would be a step adjustment in market valuations. Longer term: After an initial adjustment, the market may perform better if the pandemic is brought under control soon enough.
>>> Biden wins, Senate retains Republican majority: Near-term: Another near-term negative scenario for the markets, albeit not as negative as the one above. Here, Biden-Harris would have less maneuvering room than they would with Democratic control of both the House and Senate. The choice of Harris for Vice-President may have been reassuring for Wall Street and for the tech giants but smaller companies would still be hurt by rising tax rates and increased regulations. Longer term: Markets will scrutinize the composition of the cabinet for signs of large policy changes. The choice of Elizabeth Warren as Attorney General for example likely would raise the alarm in the finance and tech sectors, and may depress their valuations in the markets.
>>> Contested outcome: Near-term: If one or two states were too close to call (think Florida in 2000) or if one of the candidates were to contest the outcome, the market would sell off hard. Longer term: The timing of the recovery would then depend on how quickly the deadlock is resolved and on the eventual winner.
>>> Trump wins, Senate turns Democrat: Near-term: Several observers believe that a Trump win would result in large scale protests across the country. These protests would be even larger if Biden wins the popular vote and Democrats gain a majority in the Senate. Depending on the duration and magnitude of the unrest, the market would fare poorly for a few days or weeks. Longer term: The new term would be more difficult for Trump with both houses of Congress now in Democratic hands. Democrats may go for a second impeachment with now a Senate more likely to support the move. The markets would react poorly to the added uncertainty.
>>> Trump wins, Senate retains Republican majority: Near-term: This outcome would represent a continuation of the status quo. But here too, the disappointment among Democrats would lead to an increase in protests and a near-term market sell-off. Longer term: This is Trump’s best case outcome but his ability to enact more policies will be hampered by a Democratic House.
Trump prevailed in 2016 by winning Michigan, Wisconsin, Pennsylvania and a handful of other swing states. The postmortem at the time was that Hillary Clinton did not sufficiently connect with voters in those states, some of whom had been in previous cycles reliable supporters of the Democratic candidate. Biden’s more down to earth style will likely play better with these voters this time around, which is probably why he enjoys a lead in all of these states at present (to the extent that polls are representative).
On the other hand (this is politics), the average share of non-college whites in the ten battleground states is at 49% significantly higher than the 42% share in the other 40 states + DC, making it harder to displace Trump if his support remains solid in that constituency. The polling distortions mentioned above may be higher in swing states than in other states.
Adding to a muddy picture are the many farmers and their suppliers and customers in those states who may have deserted Trump years ago.
Recently read and recommended:
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