3 Potential 2020 Election Outcomes — and What They Could Mean for Investors

Lisa Beilfuss, Barron’s
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Currently, voter polls are predicting that former Vice President Joe Biden will be the next president of the US. However, anything could change between now and election day and investors need to be prepared for each possible election outcome as each has different implications for policy, the economy, and financial markets. This article focuses on 3 potential election outcomes: (1) President Trump is re-elected and Republicans keep the Senate, (2) Biden wins the presidency and Democrats win control of the Senate and keep the House, (3) Biden is elected but Republicans keep the Senate. 

A Republican win could very well mean four more years of market-friendly tax and regulatory policies. This could benefit smaller companies, technology and financial firms, and would most likely boost energy companies and defense contractors. However, a continued standoff between the US and China could lead to Chinese retaliation against US retailers. On the other hand, a Democratic sweep would mean higher corporate taxes and increased regulation, resulting in a 2-5% fall in the stock market, as predicted by UBS strategists. However, markets often overestimate the effect of proposed policies and tax increases on the markets. A “Biden portfolio” would be heavily weighted on green-energy stocks. Finally, the third scenario, a split government, could turn out to produce good results since investors would benefit from Biden’s more predictable trade policy focused on buying American, alongside a continuation of Trump’s tax policy. 

The presidential election is less than 100 days away. Meanwhile our country, and the rest of the world, is struggling to control the Covid-19 pandemic. The course of the pandemic over the next couple of months will most certainly have an impact on the election outcome and market activity. As Michael Pugliese, economist at Wells Fargo, puts it, “Regardless of who wins, if Covid is still front and center, it will consume a lot of the oxygen”. 

From Cocoa to Coffee and Sugar, Soft Commodities Stage Simultaneous Rally

Kirk Maltais, The Wall Street Journal
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Soft commodities, like sugar and coffee, are rebounding after a pandemic-induced decline. Cocoa and coffee futures have risen 15% and 14% respectively, in the past month alone. Cotton futures are up 11% and sugar futures have surged 20% over the last couple of months. The unusual rebound in commodity prices can be partially attributed to continuing problems with Covid-19 in key soft-commodity-producing nations, such as Brazil and India. Brazil is the world’s top producer of coffee and sugar, producing 59 million bags of coffee and 647 million metric tons of crushed sugar in 2019. The country has struggled to control Covid-19, raising fears that the supply of sugar and coffee is going to slow as infections rise. Investors anticipate that supply constraints coinciding with pent-up demand from nations already recovering from the virus, will drive soft-commodity futures even higher. Furthermore, the weakening of the US dollar is making it more affordable for importing nations to buy commodities priced in the US currency. According to recent data from the Commodity Futures Trading Commission (CFTC), traders are cutting back on their bets that soft-commodity prices will fall. Short positions in sugar were down almost 10,000 contracts, cocoa positions were cut by more than 7,000 contracts, and coffee shorts fell by more than 19,000 contracts last week. It is clear that investors believe soft-commodity prices will continue rising. 

The trucking industry is in the midst of upheaval—and hype 

The Economist
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As the coronavirus pandemic has accelerated the online shopping trend, the trucking industry has been disrupted by a decrease in long-haul cargo demand. Supply chains have shifted to favor a small-package warehouse approach. As one of the world’s most fragmented industries, trucking is under pressure to adapt as manufacturing moves closer to home and consumer preferences shift. Of the 900,000 trucking firms in America, 96% have 20 trucks or fewer; the competition has driven down prices for suppliers, but has also placed drivers at risk from low wages and economic disruptions like the pandemic. Logistics innovators have already revolutionized short-haul delivery, while electrification and autonomous vehicles are coming for the long-haul segment. Autonomous vehicle companies such as Tesla and Nikola have already expressed interest in throwing their hats in the ring, and Amazon has made significant investments in electric vehicles. With wages accounting for around 40% of freight costs, the cost advantage of automation is a significant boon for suppliers and a material threat to drivers’ job security. The extent of the change occurring today has not yet been fully realized in the land delivery industry, and its future trajectory remains to be seen.

US-China tensions feed into the geopolitics of monetary policy

David Lubin; Financial Times
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In a period of remarkably loose monetary policy from most of the world’s central banks, the People’s Bank of China stands out for its conservatism. This stance is not for lack of need – the bank had loosened its monetary policy in the early downturn of the pandemic, but by May market rates were picking up and bond-yields were close to pre-virus levels, despite indications that the Chinese economy is still in a slump. This reticence to continue loose policy has a number of tenable explanations. One is that tighter policy is meant to leash shadow financing (lending done outside the banking system), as high-risk loans had grown under the looser restrictions. Another explanation is the deteriorating US-China relationship, as China does not have a global currency and finds itself a target of sanctions. This has pushed China to build large economic buffers to avoid dependence on external borrowing in the event of capital flight. Higher interest rates incentivize Chinese individuals and companies to keep their holdings in renminbi, bolstering China’s fiscal defense. A third explanation is that China is hoping the Fed’s loose policy will debase the dollar to the point where the US economy suffers.