Between the electoral map and a friendly Fed, Democratic contenders are going to have a hard time simply keeping out of each other’s way.
Bad polling numbers and a stagnant approval rating are one thing. When push comes to shove, voters have historically gone with the candidate they believe will boost their finances the best.
After all, “it’s the economy, stupid.” Right now, with GDP growth tracking above 2%, interest rates falling, tax cuts and full employment, the economy points to four more years.
Otherwise, the Democrats have got to make a compelling case for why a vote against Trump isn’t ultimately a quixotic gesture built more on sentiment than self interest.
Right now it looks like he’s going to win. Five key factors:
1. A relaxed Fed is the incumbent’s friend.
Falling interest rates benefit borrowers and those who are already in debt. If the good times continue, they’ll vote for the party that threw the party, so to speak.
Unless some economically savvy Democrat (or fiscally disciplined Republican) ties low interest rates to traditional retiree income solutions or frames this in terms of a depreciating dollar, on Main Street this only looks like an easy way to keep the economy rolling.
The long-term implications are cloudy. Main Street isn’t worried about that now. Whatever happens beyond 2020 is not the political gurus’ problem.
2. The electoral map swings red.
Too many votes in California and New York don’t matter if Florida swings and the Rust Belt votes like it did in 2016. Trump could lose the popular election by 5 million votes and still stay in the White House.
The Democrats need someone who can get Middle America excited. That’s different from feeding apprehensions about Trump.
Without excitement, the status quo feels a little safer than the alternative. After all, people may decide that another term is “only” four more years they can tune out as long as they’re still employed and feeling relatively good about their role in the economy.
3. Too many Democrats, not enough messaging.
This primary season is already getting ugly, with too many faces fragmenting the audience and mostly failing to really establish themselves as major contenders.
Arguably a lot of them aren’t even trying to become president. They’re here to get famous, to become television personalities via a political track. To them, it’s the equivalent of a reality show.
That’s only great if they’re looking to win fans and not votes. Voters need a firmer message than all the zingers on Twitter can provide. Michigan, Wisconsin, Pennsylvania want an alternative vision . . . one that’s about them and their lives.
Can Biden provide that if he’s being nibbled to death by younger and more diverse rivals? Does the Bernie revolution still resonate? Can Liz Warren find charisma?
If not, Trump wins.
4. Too many Democrats, not enough fund raising.
Bernie Sanders and Liz Warren have raised around $40 million apiece so far this year. Nobody else comes close. We’ve seen 24-hour periods where Trump has attracted more cash than Kamala Harris has brought in across her entire campaign.
Money counts. It’s not only a leading indicator of where the votes will go (we vote with our wallet first), but the more air time you can buy, the better you can guide the national conversation.
This ties back to the electoral map. Money in local ad markets can win votes where you need them. Pinpoint the right districts in Pennsylvania, Michigan or Wisconsin and it doesn’t matter how they feel in the cities.
And those local markets are cheap compared to the cities. You can buy a lot of air time in the ones you need.
5. Nobody cares about the future.
Fiscal discipline is dead because people have stopped taking the long term seriously. It’s all about the gridlock of the moment.
As long as the federal government keeps the lights on for another 15 months and nobody provides a compelling vision of a better future, Trump wins. The bar has gotten low.
Forget about climate change, a perpetually looming student loan crisis or any of those talking points. The Fed’s balance sheet, long-term entitlement costs, ballooning deficits and the fate of the dollar should be even scarier if classical economics has anything to say.
And if classical economics no longer applies, then a lot of what we do in the market every day needs serious reevaluation. Are planning assumptions still accurate if the Treasury no longer cares about its ability to pay long-dated bonds?
These questions matter beyond 2020. But as far as the election goes, they’re all just scare words.
Growth is good (because) growth works
Trump’s appointees are disciples of the gospel of growth. They love an expanding economy above just about anything else.
That makes them a pariah to many more mainstream economists. I’m not really going to get in the middle of their debates.
For our purposes, the Fed’s objective has shifted to maintaining growth at any cost. Keep the economy hot. Keep voters working and consumer confidence high.
Do whatever it takes to stave off recession no matter what the yield curve says and Trump has the home court advantage in 2020 as far as the economy goes.
Remember Stephen Moore? People speculated about him replacing Jay Powell if Powell wouldn’t agree to cut interest rates.
Moore has argued that the Fed has already gone too far. It doesn’t matter what happens with inflation. If prices start spiraling, it’s someone else’s problem.
Besides, Larry Kudlow says the link between full employment and wage inflation is a myth. Evidently he’s convinced that people will be happy to take what they can get, as long as they’re working.
That might be the Democrats’ biggest rhetorical stick to wield. I doubt they’ll follow up on it when they have all their grander rhetorical propositions to follow.
The investment perspective
A White House free and able to do whatever it takes to keep the economy from stalling means stocks have room to punch through last year’s records.
Stimulus will flow into corporate income statements and get earnings growth moving again. It might not be as robust as what we saw last year in the wake of tax reform, but it’s still better than the drag Wall Street currently expects.
Smart stimulus will come from a grand bargain on infrastructure at last or some other program that can get through a divided Congress with a minimum of strain.
But one way or another you can bet stimulus is coming in the next two years.
The banks will keep starving. Sad to say, they’re used to it, but their pain and distraction is a competitive edge for independent advisors who don’t have a huge rate-dependent institution calling the shots.
Inflation can easily become a threat as we approach 2020. Wage inflation is actually not bad. When people feel prosperous they spend more and ultimately have more to invest.
Those who need to protect their purchasing power can benefit from inflation hedges. You know the playbook there: commodities, TIPS, real estate.
If stocks get a shot in the arm, the hedge is all your clients should need to do a lot better in the next two years than they would’ve in a recession.
And either way, remember, stocks generally rally 15% in the year after the curve inverts. The problems emerge beyond that point.
Would your clients trade a few good years for renewed uncertainty beyond 2020? It depends on how much they make now and what their long-term plan looks like.
I have to say the future was always uncertain so they’re really not giving much up. Life is change.
Writing covered calls is a perennial strategy when otherwise good stocks stall and investors who need current income want to hold on for better long-term upside. Unless you want to manage a sprawling and volatile options book, exchange-traded projects do all the heavy lifting on an automated basis. But even in that automated environment there are still choices: how much income should we reach for, how far do we think the stocks themselves can move before the monthly expiration window closes?