The U.S. election season has begun. While it will be several months before the nomination race is officially over, it is looking increasingly like another showdown between Democrat Joe Biden and Republican Donald Trump. Christian Medeiros, Portfolio Manager, Asset Allocation with TD Asset Management, looks at the implications for markets and global trade.
* We are once again in a US presidential election year. And while there are still several months to go before the nomination race is officially over and, oh, so much can happen, it is looking increasingly like another showdown between Democrat, Joe Biden, and Republican, Donald Trump. So what are the implications for the markets, the economy, and global trade? Joining us with his perspective is Christian Medeiros. He is Vice President and Portfolio Manager at TD Asset Management, joining me here in studio. It's nice to see you.
* Nice to see you too.
* So let's start things off. As I mentioned, it's early days. And we are a long ways away from things actually happening. And a lot can happen. But what's at stake?
* 280 days until the election, a long way away. But it's never too soon to be prepared for the scenarios. And so there's more at stake than just the White House-- obviously, a very big election-- but also there's House election and also Senate as well. So Congress is always up for election during the presidential election.
* Why that's interesting, is both of them have razor thin majorities at the moment. So the House, all the seats are up for election. It could easily flip with whoever wins the top of the ballot. And then when we look at the Senate, only 1/3 of the Senate is up for election every single time. And when we look at the Senate map for this election, it really heavily favors the Republicans. So it's very likely that it could flip the Republicans' way.
* So what that means is that there's two likely scenarios, one in which Biden quite likely has a divided government with Democratic House, Republican Senate, so a flip. And on the Trump side, if he were to win the top of the ticket, likely, the house and then the Senate would come with him too. So you'd have a unified government. So those are two very different scenarios that investors might be facing when we go through the election later this year.
* You've brought in a couple of charts. And I want to take a look at them, because I think people are always like, a divided government tends to do better than a unified one. And so let's actually look to see what has happened as opposed to talk about it. So the walk first chart we have here, tell me what we're looking at.
* Yeah, what we're looking at is we split the time series from 1970's into when the government was divided, so how Senate and the White House were not held by the same party. That's in purple. Then trifecta is when all three bodies of government if you will, are held by the same party.
* And what we see is that the returns are actually pretty similar. Divided government may be slightly better than trifecta, but it's quite similar. And I think that dispels the common investor notion that divided government is definitely better, because the politicians and policy don't get in the way of the market. But we see historically it's a bit of a wash.
* Yeah. I mean, there's a 1% difference. But really, to your point, it doesn't seem to really matter so much matters in terms of what's actually happening in the economy at that time. You have another chart here. Let's take a look at this one.
* Yeah, another really common heuristic among investors is believing that Republicans are inherently better for business and inherently better for markets than the economy. And we look at S&P 500 returns and Republican presidential years in red versus Democratic presidential years in blue, we really see that Republicans actually outperform Republican presidents. And this is a bit of a data mining--
* By a significant margin.
* Significant margin.
* And this isn't always going to be the case. There's a lot of other things going on. But this is just to show that, hey, we should really focus more on what's the balance of power in Washington, what's possible, and what are the policies that they might implement. And that will give us a better sense of what's going to happen in markets.
* OK. So thank you for dispelling the myths. Let's talk about those policies, as you just said, that matters. So President Biden has had some I would say, significant policy achievements. What do you think would a second term with President Biden might look like?
* Yeah so if he had a second term, he's likely to continue on his Build Back Better kind of agenda that he ran on in 2020. So with that, he passed an Infrastructure Act, he passed the CHIPS Act which helps subsidize high end, high tech manufacturing.
* That's bringing it back to--
* Bringing it back to the US, onshoring technology industries. And he also passed some social policies as well, helping out caregivers, health care, some redistributive policies. So he'd like to continue to do that. But in a divided government, it's going to be hard for him to pass more fiscal than he already has in his first term. So I think it would be more of a status quo kind of situation.
* OK. Let's talk a bit about-- and we'll get to trade, because I think trade is a big one in terms of I'll just say, partnerships, global partnerships, and how that's going to look. We'll save that for a second. But let's talk about taxes. So what do you see with a-- I mean, this depends, of course, if it's unified or divided-- but what do you see with President Trump? Or what could you see with President Biden?
* Yeah, so the context here is that in 2017 Trump passed a very large tax act, which cut taxes substantially on corporations and individuals. Some of those corporate tax rates, such as the headline corporate tax rate, those are permanent. Those cut down to the low 20s from the 30s.
* So those are permanent.
* Those are-- those can't really be changed. But what does come up for renewal, which would expire at the end of 2025-2026, is the Income Tax Act and also how depreciation, and research, and development costs are counted for corporations.
* Which is massive.
* Because again, you're trying to onshore and bring companies back. This incents them to do that.
* Exactly. So this is trillions of dollars of tax that are up for renewal. Under a Trump presidency, very likely to extend all of them and probably take them even further.
* He's very in favor of cutting taxes. This was his policy to begin with. We think Biden will have to probably extend a good majority of them, but he's very sensitive to redistributive policies. He wants to increase taxes on some corporations and on richer income distribution elements in order to fund some of his ambitious fiscal policy. So we'd imagine that, under Biden, would have a little bit less of these tax cuts extended, and under Trump, you'd have a little bit more.
* And would it be fair to say-- as I hear you say this, it's almost though you have a very pro-business, pro-economy under Trump, and Biden would be like that light with a bit more bifurcation, kind of trying to tax the rich so to speak, and redistribute.
* Exactly. Under divided government, Biden is going to have to really negotiate with Congress to see what can get extended, and how much of that tax can he use to fund some of his policies under Build Back Better, if he wants to do more infrastructure, or more high tech and CHIPS bills, he might want to use some of those tax renewals in favor of funding fiscal, whereas, under Trump, I think he's much more comfortable, especially if he has a unified government, extend all of them, and maybe take them a step further as well.
* What about deregulation? Because I think that's something that, depending on where you sit on deregulation, some people think this is great and some people are really concerned. What could that look like under both presidencies?
* Yeah, so deregulation is extremely important to Trump's presidency both in his first term and continues to be if he were to win again. And I think two areas where deregulation are a focus-- but really, it's across all industries-- would be financials and energy. So under financials, we saw that when Trump won in 2016, financials were the top-performing sector right after the election. They rallied about 20% between the election date and the start of his term in January. That's because financials are super regulated industry. So any deregulation is favorable to them.
* And, secondly, energy. One big thing he's been saying on the campaign trail in the primaries is drill, baby, drill. He wants to really get rid of a lot of the regulation around drilling in the US, environmental regulation, et cetera, to become more energy self-sufficient in America. So I'd imagine a lot of the regulation we currently have on the energy industry would also reduce as well.
* And Biden, just not that, I'm assuming.
* Biden would be more in favor of regulation, and think status quo, if not a little bit more regulation.
* We talked taxes. We talked deregulation. Now, let's talk trade, because I know this is the big one. Just at a high level, let's just start, when you look at the two candidates, what do you see the big differences are?
* Yeah, so for Trump, the trade agenda is first and foremost one of his most important policies. And he's much more aggressive than anything Biden is considering. So the main thing that he's been talking about is a 10% tariff across the board on all imports into America.
* Everybody, everything. Maybe some countries might be exempted, but he hasn't mentioned them. So 10% across the board is very material. That would be a huge, huge increase in tariffs across allies, across enemies as well. And what that would mean would be potentially more inflationary world, right? It's going to disrupt supply chains quite materially. It'll be a big increase in costs. And that's going to be quite a shock to a lot of nations who are used to trading with the US.
* I think-- do you think this is-- I mean, it's a negotiation. I mean, who knows? Now, we're in the world of speculation. But I wonder if it really will be a 10% across the board to everybody or is it, you know, that's your negotiating point to get whatever you need? We'll have to see.
* What about China? Because if it was complicated before, it's gotten even more complicated now. How do you see that relationship evolving?
* Yeah, so Trump has even more extreme policies on the China trade situation. And what he wants to do is two things. One is end their trade status with the US, which would raise tariffs potentially into the high double-digit percentage range, extremely punitive. And within four years, he wants to completely remove US trade ties with China on essential goods that are key for US national security, which, for him, actually is quite a lot of industries. So this is a very big decoupling from China. It's also a--
* Very inflationary.
* Very inflationary, very material also for many US multinationals that either import from China quite aggressively or export to China. So I would say, this is one of the most disruptive policies that we can expect from Trump. And look, the second half of his last presidency was so focused on trade war with China.
* And remember how those tweets really moved markets? We have visceral memories of that. And so there's no reason not to take him at his word. It's completely within the power of the President to enact trade policy even without control of Congress.
* And with control of Congress, which he is likely to have if he wins, he could even take it a step further. So I say-- I would say that trade is probably one of the most impactful policies that he's looking to do if he were to win election.
* And we've been talking about Trump. And actually, President Biden with China, what do you foresee happening there? Just again, more status quo, and more escalation though? Because things have not been going super well.
* Yeah, so the sentiment on China in Washington is dour across party lines. So I don't expect relations with China to improve. There's clearly great power divergences, a lot of divergences in views, different divergences in priorities that are not going to be resolved no matter who's president. But I would say Biden has a more-- he's been working with China a little bit more in recent months. Whereas, China is going to take a more aggressive stance.
* And further, both of them may have divergent views on allies in the region, such as Taiwan, such as other allies. So Trump is a little bit more isolationist, where Biden is more likely to engage with those alliances. So that's going to result in quite different ramifications for the region and how America approaches it.
* And one of the beneficiaries of that has been Mexico, and I assume will continue to be Mexico.
* Yeah, it's quite paradoxical almost where when Trump came to power in 2016, he was extremely negative on Mexico for a lot of reasons, not just trade, but also immigration. But they've been a big beneficiary because as we've stopped-- we've been kind of onshoring and moving away from manufacturing in China, it's been benefiting the country in America's backyard who also is quite attractive place to manufacture due to cost and proximity. So it's been-- it's been a-- Mexico has been a beneficiary from that, but for Mexico, they do need to be wary that Trump is extremely punitive on immigration and extremely punitive on other issues as well. So there's a lot of crosscurrents to be aware of, even if you're sharing a border with the United States.
* Where does Canada get caught up in these crosscurrents? I mean, we were talking before that USMCA was architected in part by Trump and his team. One would hope that when the team comes back that they may honor the agreement that's in place.
* Yeah, I would say the Trump presidency was pretty disruptive for Canada. Not only was NAFTA going to UMSCA, a long and messy process. But we also had pretty punitive tariffs against steel and aluminum as well. We had very acrimonious relations between Trudeau, who was the Prime Minister at the time, and still is, and Trump.
* So I don't think that relations under Trump will be fantastic. But let's be clear, both Trump and Biden have moved to a more isolationist stance. They've moved to a stance where America first. They moved to a stance that's all industrial policy and wanting to rebuild and sustain manufacturing at home.
* And that doesn't necessarily have Canada in the mix. So Canada is going have to be a lot more clear-eyed in how we vouch for ourselves and our relationship with America, making sure our industries are competitive, integrating ourselves into their supply chain.
* And getting at the state level having those conversations.
* Exactly, because even if you look at Biden's huge infrastructure plan, his CHIPS plan, those had a lot of buy America provisions. So Canada is going to have challenging relations with the US regardless, as we go into more isolationist world.
* We have to remember though, too-- and you pointed this out when we were sitting down-- is that this election is how many days away?
* Yeah. And a lot of things can happen. Even like two weeks ahead, things can happen. So is that something that you're watching? What are the things that could change, I guess, along the way?
* A lot can change. You know, so many things can change the polls going into the election. We have so many idiosyncratic factors this time. Both candidates are old, may or may not have health issues that could play an impact. There's legal issues for one of the candidates.
* We have a lot of geopolitical issues going on that are going to change how the polls play out. And the trajectory of the economy is going to have a big impact too. Incumbents tend to lose when we go into recession. However, incumbents tend to win when the economy is in a good shape. And so it's quite possible that the winds of the market, the winds of the economy are going to have a reflexive impact on how the presidential election will play out in 280 days.
* Christian, thanks so much.
* Thank you.