Show Transcript
The final few weeks of U.S. presidential election campaign could usher in plenty of surprises for both voters and investors. Kim Parlee speaks with Michael Craig, Head of Asset Allocation, TD Asset Management about the potential election outcome scenarios and what they could mean for markets.
Print Transcript
[MUSIC PLAYING]
- We are now just weeks away from a contentious US election. And the outcome could have a major impact on the US markets. Predictions are flying around. Our next guest is here to lay out a few outcomes for us and show us how he is thinking about what could happen. Michael Craig is head of asset allocation at TD Asset Management. He joins us now.
Michael, good to see you. Can you just start with maybe historically, how do the outcomes of US elections affect the markets?
- So it all depends on policy. So the connection between politics and markets is all policy. And so when you have candidates who come in who use a continuation of previous policy, there's not a huge change. This time around, I would say that there is quite a different path for policy, depending on who wins. And so I think this election does matter for markets.
There's a lot going on in the world. There's a lot of instability, both in markets and society. And we've got this horrible pandemic that we're dealing with too. So I think this election matters a lot for markets because I think the policy outcomes from this are going to have a great consequence on which direction economies go in coming years.
- I think a lot of people are spending a lot of time on polling and trying to understand what's going to happen. I prefer this kind of conversation where you just look at the possible scenarios and go from there. So if we could, I'd like to run through the scenarios that you and I were speaking about earlier. Let's say that Joe Biden wins the presidency, but the Senate stays Republican. What happens there?
- A lame duck executive. It would be very hard for Biden to get anything through. The divisions within government right now, between Republicans and Democrats, is at a fever pitch. So unlikely to see any bipartisan support. You might see a bit of infrastructure. Net-net, you get a lame duck session.
Positive for markets, cynically speaking, because you don't see any policy risk, and therefore we just kind of truck on.
- OK, let's go to a different scenario then, where Joe Biden wins the presidency, but the Senate goes Democrat.
- This is where you're going to have tremendous policy uncertainty. And I think there are going to be winners and losers. And this is likely to lead to an outcome, the most dispersed outcome within financial markets. So let's talk about the negatives first and then the positives second.
Negative side, higher corporate tax rates. Certainly higher taxes for higher income earning individuals. He has talked about restricting, if not banning, fracking on public lands. And there is a risk that you're going to see much more regulation within financial services, and so a myriad of negatives on that side.
On the positive side, from a market perspective, big infrastructure spend. He's talked about decarbonizing the electric grid by 2035. Now that's probably a bit ambitious. But major investments in green energy industries. And so companies that have gearing or exposure that do very, very well.
As well on the health care front, there's two phases. There's an expansion of ACA. That's probably good for health care providers. However, if he goes to health care for all or Medicare for All, which some of the progressive wing of the Democratic party wants, it would be quite negative.
And finally, I think pharma needs to be being watched as limits on drug pricing could come in, which would be negative for pharma companies. So a real kind of smorgasbord of winners and losers if you see a blue sweep across both the executive and the House and Congress.
- OK, let's ask about if President Trump wins, the Senate stays Republican, and maybe even if the House goes Republican, what would happen then?
- So first, we're going to assume that if Trump were to win, the Senate-- there's no way I can see the Senate going Democrat. So we're going to assume that the Republicans control the Senate, executive, but the House stays Democrat. Here again, we're going to have a similar situation that we have today.
Trump's policy has been limited policy. Probably another round of tax cuts, and then likely more removal of US government in many areas. You just see basically a state that doesn't do a whole lot, less regulation.
I think on the China front, I'm not certain that you're going to see as much of a hawkish backdrop. I mean, Trump won't need that anymore to get re-elected. He'll do his own thing I don't think he really has the heart to have a long term standoff with China. It's just been more theater than anything else.
So from the market's perspective, probably stronger US dollar. In the bond market. I think you see longer term treasury selloff a bit. Likely modestly beneficial for stocks, but I don't think that bump would be sustained. I think it's more-- as we started this conversation, more a sense of policy continuity, whatever the policy is. And the markets will grind higher, but not see a major material move.
- Michael, what about the scenario I think that nobody wants. I've got about a minute left here. What if we don't know? What if it's contested?
- Yeah, definitely worst case outcome for markets. Tons of uncertainty, could drag on for weeks. In 2000, the markets sold off 8% when that happened. We'd expect anywhere from a 5% to 15% selloff if the markets tried to deal with uncertainty with neither candidate conceding. So definitely the worst case outcome for financial markets.
- I have to ask you, of course, you know the headlines were flooded over the past few days with Justice Ruth Bader Ginsburg passing away. Does that ignite both sides differently than it was? Or is this more fuel to the fire?
- Well, you've seen Biden's campaign donations spike. So people obviously care about this. It looks like the Republicans are going to be able to nominate their candidate, which will be a conservative judge. This will continue to poison the relationships between the two sides, the two parties. And so I think it's fair to say that we should assume no bipartisan support for anything. And a continued fairly toxic mix of politics within Washington, I think, is the long term implication from that.
- Can I ask you just very quickly, what do you think investors need to do to be well positioned for all of this?
- There's two words of advice I can provide. One, obviously spread your investments across uncorrelated assets. So from our perspective, that means holding equities in a region such as Europe, North America, Asia. Lot of markets are going to be unaffected by the outcomes of the US election. So you don't want to have all your risk in one area that could see a big pullback.
The second is this is when tactical management can be quite useful. I just laid out four scenarios. We've structured some tactical investments that will benefit in each scenario using option strategies. And ultimately, trying it at a reasonable cost. So that's another-- having that tactical ability to take advantage.
If there's anything we learned from 2016, don't get too worked up. The markets just took off after that. And people were left scratching their heads. If you are managing your own, or if you're using an advisor like us, having that tactical lever is, I think, quite important because we'll have a pretty clear direction where we're going after election night-- if it's not contested.
KIM: Interesting times, Michael. Thanks so much.
[MUSIC PLAYING]
- We are now just weeks away from a contentious US election. And the outcome could have a major impact on the US markets. Predictions are flying around. Our next guest is here to lay out a few outcomes for us and show us how he is thinking about what could happen. Michael Craig is head of asset allocation at TD Asset Management. He joins us now.
Michael, good to see you. Can you just start with maybe historically, how do the outcomes of US elections affect the markets?
- So it all depends on policy. So the connection between politics and markets is all policy. And so when you have candidates who come in who use a continuation of previous policy, there's not a huge change. This time around, I would say that there is quite a different path for policy, depending on who wins. And so I think this election does matter for markets.
There's a lot going on in the world. There's a lot of instability, both in markets and society. And we've got this horrible pandemic that we're dealing with too. So I think this election matters a lot for markets because I think the policy outcomes from this are going to have a great consequence on which direction economies go in coming years.
- I think a lot of people are spending a lot of time on polling and trying to understand what's going to happen. I prefer this kind of conversation where you just look at the possible scenarios and go from there. So if we could, I'd like to run through the scenarios that you and I were speaking about earlier. Let's say that Joe Biden wins the presidency, but the Senate stays Republican. What happens there?
- A lame duck executive. It would be very hard for Biden to get anything through. The divisions within government right now, between Republicans and Democrats, is at a fever pitch. So unlikely to see any bipartisan support. You might see a bit of infrastructure. Net-net, you get a lame duck session.
Positive for markets, cynically speaking, because you don't see any policy risk, and therefore we just kind of truck on.
- OK, let's go to a different scenario then, where Joe Biden wins the presidency, but the Senate goes Democrat.
- This is where you're going to have tremendous policy uncertainty. And I think there are going to be winners and losers. And this is likely to lead to an outcome, the most dispersed outcome within financial markets. So let's talk about the negatives first and then the positives second.
Negative side, higher corporate tax rates. Certainly higher taxes for higher income earning individuals. He has talked about restricting, if not banning, fracking on public lands. And there is a risk that you're going to see much more regulation within financial services, and so a myriad of negatives on that side.
On the positive side, from a market perspective, big infrastructure spend. He's talked about decarbonizing the electric grid by 2035. Now that's probably a bit ambitious. But major investments in green energy industries. And so companies that have gearing or exposure that do very, very well.
As well on the health care front, there's two phases. There's an expansion of ACA. That's probably good for health care providers. However, if he goes to health care for all or Medicare for All, which some of the progressive wing of the Democratic party wants, it would be quite negative.
And finally, I think pharma needs to be being watched as limits on drug pricing could come in, which would be negative for pharma companies. So a real kind of smorgasbord of winners and losers if you see a blue sweep across both the executive and the House and Congress.
- OK, let's ask about if President Trump wins, the Senate stays Republican, and maybe even if the House goes Republican, what would happen then?
- So first, we're going to assume that if Trump were to win, the Senate-- there's no way I can see the Senate going Democrat. So we're going to assume that the Republicans control the Senate, executive, but the House stays Democrat. Here again, we're going to have a similar situation that we have today.
Trump's policy has been limited policy. Probably another round of tax cuts, and then likely more removal of US government in many areas. You just see basically a state that doesn't do a whole lot, less regulation.
I think on the China front, I'm not certain that you're going to see as much of a hawkish backdrop. I mean, Trump won't need that anymore to get re-elected. He'll do his own thing I don't think he really has the heart to have a long term standoff with China. It's just been more theater than anything else.
So from the market's perspective, probably stronger US dollar. In the bond market. I think you see longer term treasury selloff a bit. Likely modestly beneficial for stocks, but I don't think that bump would be sustained. I think it's more-- as we started this conversation, more a sense of policy continuity, whatever the policy is. And the markets will grind higher, but not see a major material move.
- Michael, what about the scenario I think that nobody wants. I've got about a minute left here. What if we don't know? What if it's contested?
- Yeah, definitely worst case outcome for markets. Tons of uncertainty, could drag on for weeks. In 2000, the markets sold off 8% when that happened. We'd expect anywhere from a 5% to 15% selloff if the markets tried to deal with uncertainty with neither candidate conceding. So definitely the worst case outcome for financial markets.
- I have to ask you, of course, you know the headlines were flooded over the past few days with Justice Ruth Bader Ginsburg passing away. Does that ignite both sides differently than it was? Or is this more fuel to the fire?
- Well, you've seen Biden's campaign donations spike. So people obviously care about this. It looks like the Republicans are going to be able to nominate their candidate, which will be a conservative judge. This will continue to poison the relationships between the two sides, the two parties. And so I think it's fair to say that we should assume no bipartisan support for anything. And a continued fairly toxic mix of politics within Washington, I think, is the long term implication from that.
- Can I ask you just very quickly, what do you think investors need to do to be well positioned for all of this?
- There's two words of advice I can provide. One, obviously spread your investments across uncorrelated assets. So from our perspective, that means holding equities in a region such as Europe, North America, Asia. Lot of markets are going to be unaffected by the outcomes of the US election. So you don't want to have all your risk in one area that could see a big pullback.
The second is this is when tactical management can be quite useful. I just laid out four scenarios. We've structured some tactical investments that will benefit in each scenario using option strategies. And ultimately, trying it at a reasonable cost. So that's another-- having that tactical ability to take advantage.
If there's anything we learned from 2016, don't get too worked up. The markets just took off after that. And people were left scratching their heads. If you are managing your own, or if you're using an advisor like us, having that tactical lever is, I think, quite important because we'll have a pretty clear direction where we're going after election night-- if it's not contested.
KIM: Interesting times, Michael. Thanks so much.
[MUSIC PLAYING]
