Further Stimulus Said to Be Already Priced into the Markets

The failure to pass a second fiscal stimulus package is causing volatility, experts said, adding to the normal pre-election jitters.

During a webinar Tuesday, “With U.S. Election 2020 Upon Us, Where Is an Investor to Go?” sponsored by Franklin Templeton, investment managers explored how various sectors of the markets would react if Democratic candidate Joe Biden was elected president or if Republican candidate President Donald Trump was re-elected to a second term. 

Jeffrey Schulze, an investment strategist with ClearBridge Investments who moderated the webinar, said, “While there is conflicting data on the economy and the election, only three incumbent presidents in the modern era have not been elected for a second term, and that was when there was a rise in unemployment in those years. When the GDP [gross domestic product] rises less than 1%, you tend to lose the election as the incumbent.” 

That has been the case this year, with record unemployment numbers as a result of the COVID-19 pandemic. On the other hand, Schulze continued, “Historically, when the markets have risen three months before Election Day, the incumbent is elected.” The markets, indeed, were on an upward trajectory three months before Election Day.

Despite these conflicting inputs, one thing is for certain between now and Election Day, Schulze said. “The failure to pass a second fiscal stimulus package is causing volatility,” he said. “We can expect higher volatility as we get to and through Election Day.” 

Julien Scholnick, a portfolio manager with Western Asset Management Co. LLC, agreed with Schulze that it is nearly impossible to predict which candidate will be elected. Therefore, Western Asset Management’s portfolio “is not dependent on any one outcome,” Scholnick said. As to how the fiscal stimulus will affect the markets, he said the markets expect a bill to be passed and have priced it in. 

However, if Biden is elected and the Democrats take the majority of the Senate seats, it is likely that the stimulus will be several trillion dollars, whereas a Republican win would likely result in a $1 trillion to $2 trillion package, Scholnick said. 

As far as the bond market is concerned, Scholnick said the Federal Reserve’s policy to keep interest rates near zero “is supportive for spread products, and we are overweight spread on the back end of the curve.” 

As to how state and local governments have been faring throughout the COVID-19 pandemic, Jennifer Johnston, a municipal bond senior research analyst with Franklin Templeton, said that because their economies are so heavily dependent on taxes from tourism, trade and transportation—and, in some states, oil and gas—they have been hit hard by the coronavirus. That said, Johnston continued, “Thankfully, they were coming off a long expansion period, with many having budget surpluses, so their economic perspective has been strong, helped as well by the fact that many communities are reopening and revenues are coming back.” 

State and local governments historically have had very low bankruptcy and default rates, which has also helped them through the downturn, Johnston said. Furthermore, many states and local governments have laws that do not allow them to file for bankruptcy, she said.  

However, she added, should another serious wave of the virus continue this fall, state and local municipalities will be “critically dependent on a fiscal stimulus for their fiscal year 2022 budgets to replace lost revenues.” 

As to when a vaccine might be available, Marshall Gordon, senior research analyst, health care, with ClearBridge, said Pfizer and Moderna are leading the way with trials for a vaccine that would consist of two doses. Both companies are conducting large-scale trials among 30,000 to 50,000 people. It is possible those vaccines will be brought to the market at the end of November, “but we won’t know until the end of the year or maybe next year whether these vaccines are safe enough for a broad population,” he said 

If the vaccines get emergency use authorization, they will first be offered to front-line medical workers and the staff and residents of nursing homes in the first or second quarter of next year, Gordon said. After that, they will be offered to older people on down beginning in the third or fourth quarter of next year, he said. Gordon stressed that he does not expect the government will require people to take the vaccine, “so it remains to be seen when the majority of people will be able to participate in an unfettered economy,” Gordon said. Beyond that, it could take another two to three years for a vaccine to reach emerging markets, he said, so it will be a slow process to eradicate the virus. 

Even though Biden is supportive of “greener” energy policies relative to President Trump, Scholnick said he would not expect the “energy landscape to be radically altered in the near term” by a Biden presidency. ”But, long term,” he said, “there would be more focus on ESG [environmental, social and governance] considerations and a secular shift away from fossil fuels to cleaner energy.” 

As to how a Biden presidency and a Democratic majority of the Senate would affect health care stocks, Gordon said that would inevitably result in downward pressure on drug prices and the expansion of health insurance coverage.