Typically, easy fiscal policy and debt issuance is negative for sovereign bond markets, leading to increased bond supply, higher real and nominal rates, steeper yield curves and higher inflation expectations. Fiscal easing financed by aggressive monetary policy risks losing market confidence.
Finally, investor sentiment is likely to take a blow from some of these proposals. Sanders, Warren and Buttigieg have all proposed a financial transactions tax for any trade of equities and bonds. In addition, Sanders and Warren have floated ideas to tax unrealized gains, raise the lower long-term capital gains tax rate, and tax financial institutions with more than $50 billion in assets. None of these policies are conducive to investor sentiment or market returns.
Will Biden Get the Nod?
Maybe not. Or maybe not right away — and this is a source of volatility. We should reiterate that this is a very unusual year with a highly divided electorate and a highly motivated Democratic party that wants to beat Trump. This may be the year that historical patterns get upended but it is worth pointing out what the ground game looks like today through the lens of previous primary seasons.
National polling is not a good indicator of where primary outcomes will lie across the states. The political market, like the real estate market, is local. The first five caucuses and/or primaries are Iowa (Feb. 3), New Hampshire (Feb. 11), Nevada (Feb. 22), South Carolina (Feb. 29) and Super Tuesday on March 3. It seems that in the first few voting states, Sanders has strengthened even as Warren has declined. Polling from The New York Times conducted Jan. 20-23 showed Sanders leading in Iowa, while CNN and NBC had Sanders pulling ahead in New Hampshire as of Jan. 26.
In politics as in sports, everyone loves a winner. Future primary results typically depend on who wins the first few races. Literally the first three races. There appears to be a kind of tipping mechanism, where future voters flock to previous winners.
Historically, and this is true for either party, no candidate who won two of the first three states went on to lose their party’s nomination for the presidency. It’s also conceivable that Biden comes in fourth in the Iowa primaries given Buttigieg’s local strength. It would be odd for the Democratic front runner to come in fourth in Iowa and this could tip Biden in the other direction, pulling him out of the race.
Meanwhile, if Sanders sweeps the early states his probability of winning the primary will increase. In the fourth quarter of 2019, Sanders’ fundraising easily beat all his rivals. The very fact that the market is not anticipating this could be another source of volatility. But the 2020 election may not be a typical year and therefore patterns of the past may not matter as much.
With some changed rules at the Democratic National Committee, candidates may be able to stay in the race longer than in the past. Unlike in previous years, delegates are now awarded proportionately, meaning that it is very possible that no candidate arrives at the convention in July with enough delegates to win, resulting in a “brokered” convention.
Michael Bloomberg, who has already spent $200 million on his campaign, could stay in the race long enough to make it to the convention in July. If he cannot be the nominee, he has enough firepower to help choose the nominee. Many political consultants see a brokered convention as more likely than in the past, and with the pressure to beat Trump, this could make Biden and/or Bloomberg ultimately victorious even if they come up short in the primaries.
What Happens the Day After?
Much remains in play for the next administration, regardless of which party wins. America’s relationship with allies and adversaries; the trade relationship with China and indeed with Europe; pharmaceutical pricing; access to healthcare; and individual tax policies are all issues that will challenge whoever holds the office come January 2021.
Whether Trump or a Democrat wins, it seems clear that the US relationship with China has changed permanently. Remember, the Democrats were traditionally the party that was more uncomfortable with trade agreements and Trump took one of their core issues as the centerpiece of his 2016 campaign and administration. Now it seems the Democrats and Trump are in agreement on China.
It also seems clear that there is no going back to the pre-2018 trade relationship with China. In Phase I, signed in mid-January, China agreed to an incremental $200 billion of agricultural, energy, manufacturing and food purchases. In addition the US was able to get protection for US pharmaceutical intellectual property, removal of financial services foreign ownership restrictions, and an end to forced technology transfers. The deal codifies bilateral consultations for dispute resolution, which gives companies a mechanism to report concerns.
Importantly the US will begin to lift some tariffs, though not all, a key source of business and CEO uncertainty. While the direct hit of tariffs to the US economy was negligible, they indirectly worked their way through the confidence and investment channels. Phase II of the pact, focused on subsidies and state-owned enterprises, will likely be pursued after the 2020 election.
A Democratic administration, theoretically more likely to pursue a multilateral approach, would not necessarily be any easier for China negotiations as these core issues could also be linked to human rights and fossil fuel concerns.
It also should be expected that a second Trump administration wouldn’t be any less aggressive about trade than it was in the first. A second Trump term could be riddled with idiosyncratic domestic and foreign affairs policy proposals, a marked increase in the US debt and a doubling down on trade talks. Trump believes that tariffs work. He believes tariffs provide him with unpredictability, and that this can be useful in negotiations as he believes they were with China and Mexico.