Developed Countries

Highlights Ultimately the US Congress will pass a major stimulus bill, but short-term risks to the equity rally are elevated. President Trump’s executive actions are not sufficient stimulus in the absence of an act of Congress. Trump’s opinion polling is starting to recover. A sustainable comeback requires Trump to sign a bill, the stock market to avoid a correction, COVID-19 new cases to continue subsiding, and crime to rise such that “law and order” resonates with voters. Depending on the data, we will upgrade Trump’s odds of victory from 35%. A major Trump comeback would increase global economic policy uncertainty relative to the United States. This would support the USD and US equity outperformance relative to global in the near term, though the opposite is still likely over the long term. Feature Over the weekend President Trump resorted to executive orders to bypass the gridlock in Congress over the next round of fiscal support for the pandemic-stricken economy. He issued four decrees that would provide $400 per week in new federal unemployment benefits; defer the 6.2% payroll tax on US workers making less than $100,000 through December 31; assist renters and homeowners with monthly payments; and delay student debt repayments. These actions are politically popular and Democrats will have trouble criticizing them. But they are not ultimately sufficient for the US economy or stock market. They should be seen as part of a “stimulus hiccup” that fails to deliver the equity market from the elevated risk of a correction in the very near term. First, these measures are leaner than any compromise bill that would come from Capitol Hill. They will also be difficult to implement as US states are required to provide 25% of the unemployment benefits while individual companies are needed to manage the payroll tax. Uncertainty will be high and compliance low, especially initially.     Second, federal courts will add to uncertainty by raising legal questions about the president’s decrees, probably issuing injunctions. The president is partly redirecting funds already appropriated, which can be gotten away with (especially during emergencies and on a temporary basis), but he is flirting with making unilateral appropriations, which is unconstitutional. Legal questions will make it harder for states and firms to know whether and how to implement the orders, vitiating their effect. Thus if the president’s actions are not quickly superseded by a full relief bill from Congress, the market will be disappointed, along with business and consumer confidence and balance sheets. Fiscal policy is of utmost importance to financial markets because the major central banks are limited due to the zero lower bound. Any premature interruption in fiscal support could cause markets to go into a tailspin on the fear that household and business finances and confidence will relapse, with longer-term damage. Chart 1Volatility Rises Ahead Of Elections Volatility has not picked up much because the pandemic numbers are improving (see below) and these executive actions offer a bridge to a full stimulus bill later (Chart 1). But that means further delays will cause bigger swings – especially if Congress does not get a deal by the end of this week. With election risks and geopolitical risks also escalating, August could easily whipsaw bullish equity investors who have grown complacent with this year’s rapid rebound. Ultimately, we maintain that Congress will pass a bill. GOP senators will succumb to political pressure. Both Trump and the Republicans are looking extremely vulnerable in public opinion polling. A failure on pandemic relief would likely be the final straw for voters. Concessions to House Democrats will produce a bill of around $2.5 trillion for President Trump to sign (Table 1). Table 1Outline Of Fifth US COVID Stimulus Package (Estimate) Chart 2Republicans Will Forgive Senate Largesse If Re-Elected The opposing risk – that Republicans will lose votes for being fiscally profligate – is a far lower bar for them to cross. Republicans worry less about Big Government when their own party runs the government (Chart 2). Assuming GOP senators get with the program and a bill is passed, markets will turn to the 2020 election battle. This election is more significant than usual because it pits an anti-establishment candidate against a political establishment that is circling the wagons, thus portending structural consequences for the US economy, particularly on trade and immigration. President Trump is the underdog because of the pandemic and recession. High unemployment is deadly for sitting presidents. Voters clearly believe he has mishandled the pandemic; they also believe he has mishandled race relations amid an explosion of racially charged social unrest. But these factors are now baked in the cake. There are three factors that can sustain Trump’s comeback in the opinion polls: Stimulus passes: Passage of a new stimulus bill will buttress the households, businesses, and the stock market. By issuing executive orders, Trump has shown he has no patience for Congress’s dithering. This will resonate with voters, but only so far. A full stimulus bill needs to be signed and disbursed to sustain his rebound in popular opinion. COVID-19 abates: COVID-19 hospitalizations and new cases are rolling over, giving society (and markets) a reason to be optimistic (Chart 3). As long as stimulus is passed, people can continue distancing without reversing the economic recovery. If the virus abates, Trump’s net approval rating will also improve. “Law and order” resonates: Trump has taken a hard line on crime, violence, and vandalism amid this summer’s social unrest. If crime rises in the suburbs in swing states, then his message may resonate with critical voters. Alternately he could gain traction for tough foreign policy on China (as long as stocks do not collapse) or Iran. Chart 3COVID-19 Hospitalizations And New Cases Rolling Over Chart 4Trump’s Comeback Begins – Is It Sustainable? Trump’s polling head-to-head against his rival, former Vice President Joe Biden, suggests that he has hit the floor in the swing states but not national polling – and it is swing states that determine the Electoral College outcome (Chart 4). If these three trends fall together, Trump’s comeback in opinion polls will be sustainable and we would need to upgrade his odds of victory, which we set at 35% in March. Global policy uncertainty would rise relative to the United States, as Trump is disruptive on the global scene. The US dollar could bounce, or at least stay flat, as near-term geopolitical risk would vie with surging debt monetization, which will weaken the dollar over the long run. US equity performance relative to global stocks would get a boost due to higher odds of more significant protectionism and trade conflict in 2021-24. By contrast, if Congress fails on stimulus, the stock market corrects, COVID reaccelerates with the school year, and the “law and order” theme flops, then Trump’s polling will see a dead-cat bounce. US policy uncertainty would rise relative to global, as Biden and the Democrats would raise regulation and taxes at home yet act with greater predictability abroad (Chart 5). Chart 5A Trump Comeback Would Boost US Equity Outperformance Until the three trends above confirm the basis for Trump to have a sustainable comeback, we maintain that his odds of victory are 35%. Our quantitative model reveals upside risk by indicating he has a 42% chance (Chart 6). Chart 6Geopolitical Strategy Quant Model: Trump Has 42% Chance Of Victory​​​​​​​ Bottom Line: Investors should be prepared for a risk-off episode in the near term in case Congress fails to compromise on a major new fiscal stimulus. Assuming they agree, President Trump will have a comeback in opinion polls that could be sustainable and justify an upgrade of his election chances. That in turn would raise the risk of significant escalation in the trade war for China (and Europe) and eliminate the risk of higher taxes and regulation in the United States in 2021. Investors who are aggressively short the dollar, or heavily invested into cyclical stocks and regions, would get blindsided in the short run by such a turn of events, even though this positioning makes sense over the long run. After all, over the long run for the dollar, the whole dynamic outlined in this report underscores that austerity is dead: if Trump wins he was rewarded for using populist spending by executive fiat; if Democrats win then their mega-spending proposition paid off. Matt Gertken  Vice President Geopolitical Strategy  mattg@bcaresearch.com ​​​​​​​

The S&P health care equipment (HCE) index is our only overweight within the health care universe, and over the past several weeks the index has been ripping higher. One of the likely catalysts behind the recent rally in US health care equipment manufacturers is the dollar. With exports accounting for a large portion of overall sales, a depreciating US dollar boosts international competitiveness of US manufacturers (middle panel). In turn, HCE stocks enjoy top line growth. On the domestic front the news is also welcoming. Our operating margin proxy, which gauges the difference between the industry’s PPI and wage bill, has made a clear U-turn (bottom panel). The upshot is that earnings will get a boost from this looming margin expansion. Bottom Line: We remain overweight the S&P HCE index. The ticker symbols for the stocks in the index are: BLBG: S5HCEP – ABT, MDT, DHR, BDX, SYK, ISRG, BSX, BAX, EW, ZBH, IDXX, RMD, TFX, HOLX, ABMD, VAR, STE, DXCM.