U.S. politics amid virus surge

Putnam Fixed Income Team, 11/11/20


  • We believe the election results remove the chance of a dramatic reorientation of economic policy.
  • The pace of the recovery is slowing after GDP growth surged in the third quarter.
  • A pickup in COVID-19’s spread will likely create headwinds for consumers and businesses.
Joe Biden claimed victory in the race for the White House after he garnered enough electoral votes to defeat President Donald Trump. Trump has not conceded and said that his campaign will continue to mount legal challenges in several states. The election results are pending certification from the states. This comes against a backdrop of an easing recovery, rising COVID-19 cases, and a potential new vaccine.

Political wrangling likely to continue

The outcome so far isn’t the last step in selecting the next U.S. president. There is still a weekslong timeline during which the 538-member Electoral College picks the president. In addition, Trump’s lawsuits have to work their way through the legal system. And some Republicans are pushing for what would be, in our view, a constitutional crisis and may be trying to steer the election to the new Congress.

That said, the election results remove the chance of a dramatic reorientation of economic policy in our opinion. Although details remain to be finalized, a Biden presidency with a small majority for the Republicans in the Senate and a smaller majority for the Democrats in the House of Representatives seems most likely at this time. This is not a configuration that we believe will support radical reform.

Democrats’ hope for a “blue wave” turns into a ripple

The idea of a “blue tsunami” did not survive very long on election night. The “blue wave” got smaller as results came in until only a ripple was left. Only significant gains for the Democrats would have brought about a major reorientation of policy, in our view, with changes to labor law, taxation, carbon pricing, a public healthcare option, and others. We believe we can rule out major changes on these policies at least until the mid-term elections in 2022.

The Democrats have lost seats in the House of Representatives. The Senate results are not complete. A final tally is expected in early January 2020 after the runoff votes in Georgia. A small Republican majority seems the most likely outcome. Overall, we see no political support for an aggressive policy agenda. This does not mean Biden will be completely powerless. A small Republican Senate majority will leave Senate Majority Leader Mitch McConnell at the mercy of his two most centrist members, Lisa Murkowski and Susan Collins. We believe there will be scope for some cross-party cooperation.

Markets look for stability

The political climate in the country is poor and will remain poor in our view. Trump’s behavior since election day will not likely help to reduce tensions. This matters when considering longer term issues such as the United States’ role in the global economy and the evolution of the conflict with China.

The political climate in the country is poor and will remain poor in our view.

Political tension could affect the economy and markets over the short term. It is possible the legal challenges by the Trump campaign could result in vote counts changing in a few states. Since margins in many places are small, this could matter. Many of these lawsuits are trivial and best seen as political theater; but even as theater we believe they inflame rather than calm tensions. It is clear that Biden has won the national popular vote by a very large margin.

In 2000, the Supreme Court adjudicated the Florida recount and decided the election. At that time, the popular vote margin was small, and Al Gore accepted the result. In 2016, the electoral college results were clear even though the margins in many states were small. Today, if Trump secures a narrow electoral college victory due to legal interventions — validated by a Supreme Court with three of his appointees — while losing the popular vote, we believe political tensions would rise sharply.

We believe this scenario is unlikely, but we can’t rule it out. If Trump is finally confirmed to have lost but insists on publicly nursing his grievances and stoking resentment, political stresses will likely remain high.

Jump in coronavirus infections creates risks

The economy continues to lose steam. That is inevitable after GDP grew a record 7.4% in the third quarter over the prior quarter and at a 33.1% annual rate. The October labor market data provided a positive surprise as employers added jobs and the unemployment rate fell. But job growth has slowed every month since June, and the data doesn’t reflect the challenges the economy faces from the resurgent virus. There are now a record number of new COVID-19 infections in many states. We believe economic weakness, induced by either renewed lockdowns or rising household nervousness, is a large and growing risk.

Manufacturing is still doing better than the service sector, but the pace of improvement has eased and the employment components in the various regional manufacturing surveys have stalled. Retail spending has picked up, but it remains a story of spending on goods. Housing activity is also easing.

inflation chart

We project fourth-quarter 2020 and first-quarter 2021 growth at an annual pace slightly below 3.5%, which is the consensus among some analysts. We see that there is risk to the downside largely because of the resurgence of the virus and a potential deadlock over further stimulus policies given the election results.

The key consideration for the economy over the longer term remains the progress with vaccines. On November 9, Pfizer Inc. and its partner BioNTech said an experimental Covid-19 vaccine was found to be more than 90% effective in preventing symptomatic infections in an interim analysis. If the Pfizer vaccine does play out without any setbacks, we believe a plausible central scenario would be for a vaccine-induced strong recovery in the second half of 2021.

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