Focus should be on policy this election year

Note: The article on this page was written and posted on Friday before tragic events unfolded at a political rally in Butler, Pa. over the weekend. 

Could you ever have made this up?! President Biden’s performance in his debate against Donald Trump was a stunning political event that may yet lead to a revision of the Democratic ticket. Vice President Kamala Harris has emerged as the most likely replacement for Biden should he drop out. Furthermore, current betting odds place her as the person most likely to be the eventual Democratic nominee, edging Biden himself by 41% to 39% in Real Clear Politics’ betting odds as of July 12. Notwithstanding George Clooney’s efforts, anything can still happen. Sen. Fetterman of Pennsylvania who had a stroke during the election campaign in 2022 may serve as an example of a candidate overcoming a health scare and a poor debate who went on to win. (Incidentally, he’s much improved in recent months.) The Biden-Trump debate was extraordinary, though his administration might find some solace as first debates usually spell trouble for incumbent presidents, costing them 2.4% in the polls on average. And although obviously memorable, memories have a tendency to fade, if I’m looking for a silver lining here.  In this election, one-fourth of voters regard both candidates with disdain (although my ad hoc survey suggests it’s a much larger number), and this may be the group that decides the race. None of the past 10 elections has featured so high a number of these so-called “double haters.” Why are Biden’s approval ratings so low with the economy humming along and inflation finally in retreat? TrendMacro suggests that voters think of the wage growth they’ve enjoyed (which has essentially kept up with price increases) not as a simple result of inflation but as something they earned and which inflation has now taken away. 

Let’s put our emotions aside for the moment and compare Biden and Trump in terms of policies and the potential investment implications. Assuming divided government, which might arguably be the case even if there’s a “slim” sweep, one would expect Trump to extend the tax cuts and drop corporate tax rates to 15-20%. Biden, by contrast, would limit the tax cuts to individuals making $400K per year or less and married couples making $450K or less while increasing corporate taxes from 21% to perhaps 28%. The Inflation Reduction Act is likely to survive a Trump win, though the GOP might pare it back. Immigration would likely slow under Trump, but it could be that the labor market is already weak enough that this would fail to stoke inflation. As for tariffs under Trump, the 10% global tariff he has proposed seems less likely to go into force than the 60% tariff on Chinese imports. Certain sectors and industries would fare better depending on which candidate wins. If Trump, expect India to benefit from China tariffs. Other areas that could benefit from Trump: Financials, liquid natural gas, Medicare Advantage and for-profit education. As for Tech, Biden might be softer on export controls of semiconductor firms but firmer on regulation of big tech here and abroad. The reverse is true for Trump. A trade war, more likely under Trump, would hurt Industrials. In election years, we normally see Energy trade sideways or lower from this point until the election but then look for a jump afterwards. Finally, there are certain issues either candidate will face. We’ll bump up against the debt ceiling in the summer of 2025. Trump’s individual tax cuts sunset at the end of 2025 as do ObamaCare subsidies. The tax cuts are set to add $2 trillion or so to the debt whoever wins. Plus, the USMCA (NAFTA) is due for a review in two years. And certain features of both presidencies seem likely to remain: high deficits, skepticism towards China, protectionism and industrial policy. The populist phenomenon in the U.S. and globally suggests further issuance of debt to be paid at some indeterminate time in the future – as we continue to kick the can down the road.

Should Trump debate Biden again on September 10 as scheduled? Arguably no, since he may have already had the best outcome he could hope for from the first debate. Trump is virtually certain to be the GOP nominee, conviction notwithstanding. The same cannot be said for Biden though he cannot be forced out unwillingly. This could come to a head quickly. In order to get on the ballot in Ohio, one must be nominated by August 7. Since the Democratic convention takes place August 19-22, the Democrats plan to have their delegates conduct a virtual Biden nomination online before August 7. Once nominated, the Democratic National Committee can still remove a candidate by a vote of the committee (this was done with the vice president in 1972). If Biden were to bow out, the alternative in all likelihood would be Harris. The key to Biden’s fate will be not just presidential polls but those down the ballot, especially the Senate races in Ohio and Montana. Post-debate polling from Wisconsin and elsewhere is having an impact on Congressional Democrats. If the sense builds that Biden is a liability who could cost Democrats the Senate, watch out. Then there are the all-important swing states. Per the July 9 Cook Political Report, Wisconsin, Pennsylvania and Michigan remain tossups, but of these three Pennsylvania looks most open to Trump. Politico obtained a memo from the Biden campaign that confirmed the most realistic path to the 270 electoral votes needed for Biden to win relies on winning Michigan, Pennsylvania and Wisconsin. Still, as much as the debate seemed like an earthquake to many watching it, so far the harm is in low single digits. Not so unbelievable considering both men’s heavy baggage. Thus, it will likely come down to independents in a handful of swing states. The Real Clear Politics polling average currently shows Trump 3 points ahead of Biden, with their betting odds indicating Trump at a 56% chance of winning. The biggest variables this summer and fall are likely to be inflation and unemployment. A Gallup poll released before the debate showed Democrats more enthusiastic about voting against Trump than they are about voting for Biden. Politics used to be boring … Oh, and the market has not begun to price in anything …

Positives

• Consumer prices cool down The consumer price index fell to 3% y/y in June from 3.3% the month before, beating expectations of 3.1%. On a m/m basis, prices rose 0.1%, as expected. Of particular note, owners’ equivalent rent rose by a mere 28 basis points in June, in-line with the pre-Covid average and well below the much higher levels (42 basis points and up) seen since August 2023. New tenant lease rents had already reverted to pre-Covid, so this could be important.
• Baby steps The NFIB’s Small Business Optimism index rose to 91.5 in June versus expectations of 90.2. Still, the figure has remained below its long-term average of 98 for 30 straight months. Inflation worries remained top of mind for business owners.
• Earnings preview As banks kick off the Q2 earnings season, specifics on AI could well be among the most important details given on calls. Current consensus calls for 10% y/y quarterly EPS growth, with revenue rising by 4.1% In the view of Absolute Strategy Research: two sectors to watch for a rebound: Health Care and Energy.

Negatives

• Producer prices heat up The producer price index surprised, rising 0.2% m/m in June versus expectations of 0.1%. On a y/y basis, PPI rose 2.6%. There is nonetheless a bright side to the report: PPI categories that feed into PCE, such as medical care and financial advice, showed only slight increases. 
• The uneasy consumer The University of Michigan Consumer Sentiment survey fell to 66, its lowest level in eight months. Still, one-year and five-year inflation expectations both fell from 3% to 2.9%. Consumer credit rose by $11.4 billion in May, versus consensus of $8.9 billion, mostly due to revolving credit. The pace of consumer credit growth, however, has been slowing since last year and on a three-month basis looks more benign.
• Still made in China In June, China’s global monthly trade balance rose to a record $99 billion. The government has been pushing ever-higher output even as Chinese citizens watch their purse strings amidst the country’s malaise. The U.S. imported $32 billion more from China than it sent there, while for the EU the figure was $23 billion. 

What Else

The downside of protectionism If there’s no trade war, Goldman sees the ECB and the Fed dropping rates by as much as 200 basis points over the next two years. A trade war would likely cause divergence between the central banks, as it would cause inflation in the U.S. and stagnation in Europe. 

Got milk? In Denmark, the government is now charging dairy farmers about $100 per cow in a bid to reduce greenhouse gases. The is the world’s first carbon tax imposed on agriculture and is set to increase to roughly $240 by 2035. There are about 547,000 milk cows in Denmark. That figure in the U.S. is 9.3 million. 

Ah, for boring politics … In terms of electoral votes, George Washington is the only president elected unanimously, a feat he managed both times that he ran. In 1820, James Monroe ran for re-election unopposed. He would have been the second person elected unanimously, but a New Hampshire elector who held him in low regard cast his ballot for John Quincy Adams instead.