• Election week has finally arrived, and economists and market participants continue to contemplate various outcomes as it relates to future fiscal policy, regulation, etc.
  • Q3 GDP growth was better than expected, aided by aggressive monetary and fiscal policy
  • The resurgence in COVID-19 cases in Europe has sparked fresh lockdowns in the U.K., France, and Germany, and fears that another wave could occur in the U.S. weighed on risk assets in October

Thankfully, the moment has finally arrived. By the time this commentary is published, election day will have passed, and we can only hope that the presidency and congressional elections will have been decided. That is perhaps an overly optimistic expectation, but either way, economists and financial market participants have been contemplating the various scenarios (Blue wave, Red wave, or status quo) and how it might impact fiscal policy, regulation, etc. Recent polling suggests a Blue wave (Biden wins and Democrats gain majority in Congress) is the highest probability event, but nearly everyone is less confident in polling figures given the 2016 election surprise. Nevertheless, we can still speculate on likely policy initiatives in each scenario. The general market expectation is that a Blue wave would result in the largest fiscal stimulus bill, which all else equal would be bearish for Treasury yields. At the same time, a very active Fed should limit significant curve steepening. A status quo or scenario where Republicans retain majority in the Senate would likely result in the smallest fiscal stimulus.

If Biden wins, his top priorities are expected to be COVID containment, which would include a large stimulus and infrastructure spending package, and a tax reform bill that would likely include raising the corporate tax back to 28%. However, if Republicans retain majority in the Senate, these initiatives become less probable, and Biden would likely have to rely more on executive orders amid legislative stagnation. Executive orders related to regulatory actions would be a higher probability either way, particularly regulations related to fossil fuels and the energy sector (more so than increasing regulation on the financial sector). In a status quo scenario, we would expect more of the same over the next four years, with the Trump administration focused on confronting China and other trading partners via tariff threats.

Strong Q3 Growth, But COVID-19 Resurges…

The first estimate of Q3 GDP growth was released on October 29, and it showed the economy expanding by 33.1% quarter-over-quarter (annualized) following the 31.4% Q2 decline, reflecting aggressive monetary and fiscal policy in response to the COVID crisis. The Q3 gain was by far the largest quarterly figure on record, but the economy remains down 3.5% (not annualized) from the end of 2019. A robust 40.7% increase in personal consumption boosted Q3 growth, and a strong September retail sales report provided a nice launching point for Q4.  However, the pace of growth is expected to slow dramatically for the current quarter, with the current Bloomberg median economist survey projecting a 4% quarterly rate to finish 2020. Exhibit 1 tracks real GDP in dollar terms, using the median economist survey from Bloomberg to project forward into 2022. If these projections were to hold, GDP would not get back to Q4 2019 levels until the third quarter of next year.

Rising COVID cases in Europe and the U.S. in October weighed on risk sentiment, reminding market participants that virus containment remains a major determinant of economic outlook. The S&P 500 posted a -5.6% return in the final week of October, the worst week of performance since March and fueled by COVID concerns. Resurgence of the virus has been met with renewed restrictions in parts of Europe. On October 31, British Prime Minister Boris Johnson announced a new 4-week lockdown for England in response to the recent outbreak that sparked concerns of hospitals being overwhelmed if nothing was done. The U.K. joins European neighbors France, Germany, and Belgium in instituting a second lockdown to limit the rapid spread of the virus. There have not yet been any new restrictions announced in the U.S., but if the current trend continues, government leaders will likely be pressured to respond. However, even without restrictions, some could choose to voluntarily restrict activity, and either way, consumption and overall growth would be affected…

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