US ELECTION OUTLOOK 2020: MARKET IMPLICATIONS FOR FIXED-INCOME INVESTORS
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October 2020
TOPIC OF FOCUS: INVESTING
US ELECTION OUTLOOK 2020:
MARKET IMPLICATIONS FOR FIXED-
INCOME INVESTORS
On the Web: https://wam.gt/3kmVokZ
With so much at stake, the 2020 US presidential election could have far-reaching implications for fixed-
income investors. Beyond the race for the White House, a shift in the Senate and House majorities during
this election cycle could also result in significant reverberations for the future of the US economy and
investment landscape. Here we focus on five key issues to provide a comprehensive look at the potential
implications of the 2020 election results.
KEY TAKEAWAYS
President Trump’s hospitalization due to Covid and the related infections of
many top White House advisors and staff contribute greater uncertainty to the
potential investment implications ahead of the November election.
The recent passing of Supreme Court Justice Ruth Bader Ginsburg and the pro-
cess of confirming her replacement add a new dimension to the political land-
scape and could reduce the chances of the White House and Senate splitting.
While there are stark policy differences in other areas, we believe that if either party
controls both the White House and Congress, substantial fiscal stimulus is likely
to be a primary order of business. However, the process of confirming a Supreme
Court replacement will likely dominate the focus in Washington in the near-term.
Although President Trump has not yet proposed any changes to tax policy, future
tax hikes may be inevitable given the severity of the Covid-induced economic
downturn and the current record level of the US budget deficit; however, we
believe taxes would generally be higher under a Biden administration.
Under a President Biden, we could see an improvement in the US-China
relationship, which may further contribute to the global economic recovery.
Given that markets will likely remain sensitive to headline risk, we remain
focused on positioning our portfolios to withstand further market volatility.
© Western Asset Management Company, LLC 2020. This publication is the property of Western Asset Management Company and is intended for the sole use of its clients, consultants, and other intended
recipients. It should not be forwarded to any other person. Contents herein should be treated as confidential and proprietary information. This material may not be reproduced or used in any form or
medium without express written permission.US ELECTION OUTLOOK 2020:
MARKET IMPLICATIONS FOR FIXED-
INCOME INVESTORS
The onset of the COVID-19 pandemic and its associated economic fallout have already added significant uncertainty
to the outcome of the US presidential election this November. After a heart-rending plunge in March and April,
economic activity has bounced back over the past few months. However, even the sectors that have bounced most
strongly have not yet fully recovered, and other sectors have only begun their recoveries. Furthermore, President
Trump’s hospitalization in early October due to Covid—along with the infection of several close White House
aides and staff—as well as the recent passing of Supreme Court Justice Ruth Bader Ginsburg and the process of
confirming her replacement now add a new dimension of uncertainty to the political landscape. These enormous
developments could reshape stakes in not only the presidential race, but also in a number of key Senate races.
At the time of writing, former Vice President Joe Biden leads President Donald Trump in polling. However, Trump’s
potential pick for a replacement for Justice Ginsburg could meaningfully shift the tone of his campaign over the
next few weeks; historically, Trump’s court policies have been generally popular among Republican voters.
“The wider results
As we saw during the 2016 election, the impact of several key swing states could easily shift the overall presidential
will likely have election outcome. Beyond the office of president, other elections in this cycle will result in either a further divided
an even greater or a more unified government. The wider results will likely have an even greater impact on future policy, and in
turn, on markets, than the outcome of any one race. Presently, Republicans hold a majority of the Senate seats
impact on future
up for re-election, giving Democrats several opportunities to break up the Republicans’ current 53-seat majority.
policy, and in turn,
on markets, than While the overall health of the US economy will be front-and-center for markets that remain sensitive to headline
risk, there are also several other key issues in focus that may impact global fixed-income investors ahead of the
the outcome of any
November vote.
one race.”
SUMMARY OF FIVE KEY ISSUES
1. Covid-Related Policy Support: Fiscal and Monetary
Fiscal and monetary policy will work to support the economic recovery in the US, but it is not clear how effective
these tools will continue to be. The last few months witnessed an extraordinary amount of bipartisanship in fiscal
policymaking. The magnitude and severity of the economic emergency driven by COVID-19 led to an unusual mo-
ment of Republicans and Democrats coming together to act efficiently. The extraordinary fiscal packages released in
March and April were passed with near-universal support and have been an important lifeline for the US economy.
Such bipartisanship is certainly not guaranteed to last, however, and the breakdown of negotiations regarding the
latest economic relief package may be an early warning sign of Congress members reasserting partisan consid-
erations. Though it was widely expected that the current impasse would be resolved soon, the new emphasis on
confirming a replacement for Justice Ginsburg will likely consume the entirety of the Senate’s focus ahead of the
election. In light of these most recent developments, we expect that the outlook for fiscal policy will now depend
on the outcome in November, with a new deal unlikely to be passed before December.
With respect to US monetary policy, we believe that Federal Reserve (Fed) policy will likely be unaffected by the
Western Asset 1 October 2020US ELECTION OUTLOOK 2020: MARKET IMPLICATIONS FOR FIXED-INCOME INVESTORS
election. Through its official statements following recent Federal Open Market Committee (FOMC) meetings and
in comments made by Fed Chair Jerome Powell and other Fed governors, the Fed has strongly communicated
its intention to maintain a dovish monetary policy for the foreseeable future. Yet while the Fed’s broader policy
is unlikely to be affected by the election, the passage (or lack) of additional fiscal stimulus before December may
influence the Fed to consider even more accommodative measures at its December FOMC meeting.
Market Implications: Thus far, markets have reacted the most strongly and most positively to stimulus-related news.
If either party controls both the White House and Congress, substantial fiscal stimulus is likely to be their first order of
business in early 2021. This will probably be the case under either a Democrat- or Republican-led government, as neither
party has shown much aversion to deficits in the current environment. With that said, the overall amount of stimulus
offered remains up for debate. Should we see unified control over the White House and Congress, the amount of fiscal
stimulus is likely to be meaningfully greater than under a divided government.
2. US Tax Policy
While the need for additional fiscal stimulus to mitigate the economic fallout of Covid is a largely bipartisan con-
cern, the contentious issues for fiscal policy will be the extent to which the federal government should help state
governments cope with their budgetary problems that were exacerbated or instigated by the Covid crisis, and
whether to roll back corporate tax cuts enacted two years ago.
Prior to President Trump’s Tax Cut and Jobs Act of 2017, the US corporate tax rate, which is now 21%, stood at 35%.
If elected, Biden would support raising corporate taxes to 28%. On top of higher corporate taxes, Biden would
impose a 15% minimum tax on profits—a move that would limit the ability of companies to minimize their tax
bills. Regarding individual income tax rates, Biden supports restoring the top marginal rate to 39.6% for people
making over $400,000 annually, up from its current 37% rate. Those making over $400,000 would see an increase
in their Social Security payroll taxes. (Currently, only wages up to $137,700 are subject to the Social Security tax,
of which the employee’s share is 6.2%.) Finally, those with incomes exceeding $1 million would have their capital
gains and dividends taxed at the same rate as ordinary income.
While President Trump has not yet proposed any changes to tax policy, future tax hikes may be inevitable given
the severity of the Covid-induced economic downturn and the current record level of the US budget deficit. With
that said, we believe it is safe to assume that taxes would be higher under a Biden administration than with a
second Trump term.
“Any substantial Market Implications: Any substantial changes to tax policy will hinge upon control of the White House and Con-
gress. Markets tend to like a deadlocked Congress as that makes it less likely that sweeping new laws will be passed.
changes to tax Therefore, should Democrats control the White House and both houses of Congress and gain the ability to more easily
policy will hinge pass tax-related legislation, we would expect spreads broadly to widen on the general concern of lower growth due
upon control of the to higher taxes. However, on a relative basis, we believe the impact of a potential Biden package is likely to be more
positive for the tax-exempt municipals market.
White House and
Congress.” 3. US Infrastructure Investment
Infrastructure investment is one of the few bipartisan issues to consider this election season, as both candidates
have outlined meaningful infrastructure-related proposals.
Trump’s plan details $1.5 trillion of spending, focused on traditional infrastructure. Over 10 years, the Trump pack-
age would spend $810 billion on highways and transit, and $190 billion on rural broadband, 5G cell services and
other non-transportation infrastructure. The plan largely ignores clean energy and seeks to expedite the approval
process for infrastructure projects.
Western Asset 2 October 2020US ELECTION OUTLOOK 2020: MARKET IMPLICATIONS FOR FIXED-INCOME INVESTORS
In comparison, Biden’s proposal details a larger $2 trillion infrastructure plan over four years. Biden’s plan includes
investments in clean-energy infrastructure and to provide American municipalities (of more than 100,000) with
quality public transportation by 2030. Additionally, Biden’s proposal seeks to tie federal investment in infrastructure
and transportation projects to minimum wages and union jobs by requiring that federally funded projects be
covered by prevailing wage protections.
While infrastructure spending in itself is a bipartisan issue, there is limited certainty thus far and likely differences
“As both candidates regarding how each plan would be funded. Biden’s rhetoric has shown him to favor increased taxes on higher
favor significant wage-earners and corporations, which would likely be incorporated within his proposal. Trump’s plan provides
$200 billion in federal government spending through an expansion of the existing Transportation Infrastructure
infrastructure Finance and Innovation Act and the Water Infrastructure Finance and Innovation Act to leverage state project
spending, we spending. The Trump plan also seeks to expand private-public partnerships, and remove caps on private activity
would expect bonds (PABs). Trump does not propose any revenue increases to fund the spending, and is seeking to eliminate
the 3.8% Medicare surcharge tax and make the 2017 Tax Cuts and Jobs Act tax structure permanent.
industries such as
basics and Market Implications: As both candidates favor significant infrastructure spending, we would expect industries such as
basics and construction to benefit under either presidential outcome. However, given that aspects of Biden’s infrastructure
construction to
plan are inherently linked to his clean-energy objectives, even a partial implementation of his infrastructure proposal may
benefit under have a negative impact on the traditional energy sector. Further, should Democrats control both houses of Congress and
either presidential the White House, the defense industry might suffer due to decreased government flows.
outcome.” 4. US-China Relations
The Chinese economy has mostly recovered from the work stoppages and mobility restrictions resulting from
the pandemic (Exhibit 1). However, its key weakness is related to the external sector, which is undermined by the
backdrop of a rapidly deteriorating US-China relationship.
Exhibit 1: China Recovery on Track With Services Improving
Cement Shipment Heavy Truck Sales Rebar Demand Property Sales Hotel Occupancy
Auto Sales Domestic Flights Smartphone Sales Subway Passenger Volume Box Office
200
180
Index, Year Start = 100
160
140
120
100
80
60
40
20
0
07 Jun
27 Jan
05 May
16 May
27 May
16 Jan
12 Aug
18 Feb
29 Feb
07 Feb
18 Jun
29 Jun
01 Aug
13 Apr
24 Apr
11 Mar
22 Mar
02 Apr
05 Jan
10 Jul
21 Jul
Source: CEIC, Wind, STR, CPCA, Company Data, TravelSky, Morgan Stanley Research. As of 13 Aug 20
Given the track record of bipartisan Congressional support for recent anti-China legislations, we are not hopeful
that either election outcome will produce a material improvement in the US-China relationship. Currently, the
dynamics of the relationship are driven by the hawks in both nations, and China appears unlikely to back down on
its strategic positions (e.g., related to its policies regarding Hong Kong and Taiwan). The Chinese government has
a long-term perspective and will likely be positioned for a worst-case scenario of heightened US-China strategic
rivalry, regardless of which camp wins in November.
Western Asset 3 October 2020US ELECTION OUTLOOK 2020: MARKET IMPLICATIONS FOR FIXED-INCOME INVESTORS
That said, it is possible that a Biden-Harris administration may improve the form (not necessarily substance) of the
US-China relationship. There could be some room to “agree to disagree” and for a peaceful co-existence if tensions
are not amplified by hawks on both sides of the US-China relationship.
Market Implications: Markets have already been pricing in a partial and gradual disentanglement of global supply
chains dependent on China. An escalation in tensions would accelerate that trend with certain industries negatively
affected (e.g., retail and manufacturing industries scrambling to adjust) while others may see a positive boost (e.g.,
telecom and technology).
5. US-Europe Relations
“In many ways, Much of our future outlook on US-Europe relations will also hinge upon which party controls the chambers of
Congress come November, in particular, the Senate. Though understandably, the outcome of the presidential
the US-China election will be instrumental in setting the tone of future policy decisions.
relationship could
During a second Trump term, we would expect to see US trade policy focus increasingly on the US trade balance
serve as a blueprint
deficit with the eurozone (Exhibit 2). In many ways, the US-China relationship could serve as a blueprint of what
of what is in store is in store for Europe. We also see a chance that divergent monetary policy—in case the Fed were to remove
for Europe.” accommodation significantly earlier than central banks in Europe, resulting in a stronger US dollar—could bring
us back to a discussion about currency wars.
Exhibit 2: US Bilateral Trade Balances With the Eurozone (% of GDP)
-0.2
-0.3
Goods & Services
-0.4
Percent
-0.5
Goods
-0.6
-0.7
-0.8
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
Source: Haver Analytics. As of Jun 20
Under a Biden-Harris administration, we would expect a return to more global cooperation, though not to the level of
the early Obama years. We foresee a stronger international engagement than currently exists and we think some of the
decisions made under Trump could be rolled back, in particular with respect to the withdrawal of the US from the Paris
Climate Accord and the World Health Organization. We also believe that a Biden presidency would imply more support
for functional international organizations, especially the World Trade Organization. However, we note that the Biden
platform is viewed as “moderate” within the Democratic Party and such an administration will be required to balance
catering to the left wing of the party. Without full control of Congress, a Biden-Harris presidency may be limited in its
ability to effect a continuity of sorts with the policies promoted by the Obama administration.
Regarding US-UK relations, we believe that a mutually beneficial trade arrangement might be somewhat harder
to reach under a Democratic president given the potential for conflict with the left wing of the party. That said,
we don’t foresee such an agreement as a policy priority under either administration.
Western Asset 4 October 2020US ELECTION OUTLOOK 2020: MARKET IMPLICATIONS FOR FIXED-INCOME INVESTORS
Market Implications: While unlikely, we believe any meaningful changes to trade policy with the UK or EU would introduce
massive uncertainty with regard to global trade. Moreover, we believe that it’s possible a Biden administration would
be much more willing to engage, like a replay of 2008-2009, in a constructive discussion around a one-off increase of
country financing quotas at the International Monetary Fund. Such an increase could somewhat alleviate the enormous
financing needs of emerging and developing countries in the face of COVID-19, and be viewed as positive for global markets.
Scorecard: Five Key Issues
Split White House and Senate Blue Wave
1. Covid-Related Policy Support: Fiscal and Monetary
NEUTRAL NEUTRAL/POSITIVE
Partisanship will likely limit any meaningful fiscal policies Substantial fiscal policy could be passed in short order. But,
being passed and implemented. On monetary policy, assuming a vaccine is introduced and the economy continues
the Fed would likely retain its dovish stance and contin- to recover (and certainly by the inauguration on Jan 20, 2021),
ue to support the markets. the near-term economic impact might be difficult to assess.
2. US Tax Policy
NEUTRAL NEUTRAL/CAUTIOUS
The tax cuts enacted from the Tax Cut and Jobs Act of Biden’s platform includes increasing taxes for both corpo-
2017 would be expected to remain in place. As such, we rations and individuals. We would expect tax increases to
would expect little impact to the markets/economy. mitigate (on the margin) economic growth and, by exten-
sion, the markets (e.g., corporate spreads). But, tax increas-
es would be positive for the municipal market.
3. Infrastructure Investment
NEUTRAL NEUTRAL/CAUTIOUS
Partisanship will likely limit the potential size of any Biden would likely implement various facets of the “Green
eventual infrastructure spending and is expected to limit New Deal.” The availability of shovel-ready projects related
the impact to the markets and economy. to clean energy may limit the size of near-term infrastruc-
ture spending. The traditional energy sector will likely be
negatively impacted due to the curtailment of fracking
and exploration activities (particularly in environmentally
sensitive areas). Also, the defense industry will likely be
“Given that mar- negatively impacted due to available funds being shifted
to other spending priorities.
kets will likely
4. US-China Relations
remain sensitive to
NEUTRAL NEUTRAL
headline risk, par- Continued partisanship may limit changes to the exist- A Biden administration may improve the form (not sub-
ticularly those that ing policies related to China. stance) of the US-China relationship.
could come in the 5. US-Europe Relations
NEUTRAL NEUTRAL/POSITIVE
form of another Partisanship will likely limit the return to policies pro- A Biden administration may seek more cooperation with
‘October surprise,’ moted by the Obama administration (especially if Trump organizations such as the WTO and WHO, and re-engage
is reelected and the Senate majority is retained by the the US on the Paris Climate Accord. Major shifts in trade
we remain focused Republicans). policy are not expected under a Biden administration
and the elimination of tariff surprises would likely “calm”
on positioning markets (and generally be positive for European spreads).
our portfolios to
Summary
withstand further
As witnessed during the 2016 election, the ability of polls to predict election outcomes is limited. With several weeks
market volatility.” to go before November, outcome uncertainty is high. The current political landscape was already exacerbated
by the economic and healthcare climate as well as renewed calls for racial justice. The latest focus on a Supreme
Western Asset 5 October 2020US ELECTION OUTLOOK 2020: MARKET IMPLICATIONS FOR FIXED-INCOME INVESTORS
Court replacement adds additional uncertainty to election outcomes and could reduce the chances of the White
House and Senate splitting along party lines. It is important to note that with respect to this election cycle, more
than just the presidency is at stake; there are a number of highly contested Senate races, the outcome of which
could lead to Democrats gaining full control over Congress.
Given that markets will likely remain sensitive to headline risk, particularly those that could come in the form of
another “October surprise,” we remain focused on positioning our portfolios to withstand further market volatil-
ity. As always, we are also focused on remaining flexible enough to capture value opportunities as they appear,
particularly in those sectors most likely to be influenced by election outcomes.
Past results are not indicative of future investment results. This publication is for informational purposes only and reflects the current opinions
of Western Asset. Information contained herein is believed to be accurate, but cannot be guaranteed. Opinions represented are not intended as an
offer or solicitation with respect to the purchase or sale of any security and are subject to change without notice. Statements in this material should
not be considered investment advice. Employees and/or clients of Western Asset may have a position in the securities mentioned. This publication
has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information, you should consider
its appropriateness having regard to your objectives, financial situation or needs. It is your responsibility to be aware of and observe the applicable
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