A deep recession should hurt Trump’s reelection bid, but this isn’t a usual downturn
With less than a week until the election, it’s not clear whether news from the economy and stock market will help or hurt President Donald Trump. But Wednesday’s massive drop in the Dow can’t be helping.
On top of that: No incumbent has ever won a second term when there has been a recession in the two years leading up to the election, according to data from RiverFront Investment Group. Think Jimmy Carter, George H.W. Bush, and Herbert Hoover.
But this, to put it mildly, is a strange downturn.
“A lot of recessions are caused by high interest rates or the unwinding of a bubble,” said Ashok Bhatia, deputy chief investment officer of fixed income with Neuberger Berman in an interview with CNN Business.
“One should be careful of saying that this recession is bad for the incumbent since it had a much different cause,” he added.
The Trump economy vs. other presidents
Still, Wednesday’s plunge in the Dow can’t be helping Trump’s chances, even amid rising hopes that this recession will be brief. In fact, the government is expected to report Thursday morning that gross domestic product in the third quarter bounced back sharply. And parts of the economy, most notably housing, have proven to be remarkably resilient.
Hopes for a revival in the economy — as well as corporate earnings — are also big reasons why the stock market has rallied sharply since March.
“Investors priced in the shutdown and reopening of the economy earlier this year and are now waiting for what’s next,” said Markus Schomer, chief economist with PineBridge Investments.
Yes, there has been more volatility in recent weeks due to fears about rising Covid-19 cases. But despite their nearly 3% drops Wednesday, the S&P 500 is still up for the year, and the Nasdaq — led by America’s tech giants — has surged nearly 25% in 2020.
So the rebound in stocks over the past few months could be a notch in the Trump column — but it’s not that simple.
Some argue the real reason the market has bounced back is because investors are betting on a Biden victory and blue wave that will give Democrats control of the Senate.
Stock rally may not signal a Trump win
That could lead to another round of economic aid from the White House and Congress early on in 2021.
“Despite what’s going on now, investors expect more stimulus and a return to normalcy. You do have a good amount of money betting on a Biden presidency and even a unified House and Senate,” said Tim Barron, chief investment officer of Segal Marco Advisors.
Wall Street may not be scared off by the prospect of Biden and Congress quickly undoing Trump’s tax cuts either. That’s because some think Biden is likely to focus more on stimulus, which could include a long-awaited infrastructure spending package, as a more immediate need than tax reform.
“Nobody wants to risk this recovery. Public officials should do no harm,” said Talley Leger, senior investment strategist with Invesco. “Nobody in their right mind would want to raise taxes right now.”
Leger pointed out that if Democrats don’t win the Senate, it will be harder for a President Biden to undo all of the Trump tax cuts. And even in a blue wave scenario, Leger argues that Biden might look to follow the more moderate lead of his former boss Barack Obama.
Forget the president. The Fed matters more for the market
Wall Street is more focused on whether there will be more stimulus coming from the Federal Reserve. And that’s not likely to change.
Investors expect Fed chair Jerome Powell will be reappointed to a second term no matter who wins the presidency, so he can continue to manage the central bank’s response to the coronavirus crisis.
“As long as Powell wants another term, he probably would get it,” said Neuberger Berman’s Bhatia.
There are also hopes that once the election campaign is finally over, the White House and Congress will refocus on getting more money to consumers and businesses — no matter who’s the president.