Early market reaction to the U.S. election

While the U.S. presidential election is still almost a year away, markets are already seeing the effects.

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For starters, the November 2020 election is creating some urgency for a trade agreement with China, says Ignacio Sosa, director of international relationship management at DoubleLine Capital in Los Angeles, Calif.

“As we look at 2020, we see a situation where we’re not going to have this headwind of additional tariffs,” he said in an Oct. 16 interview.

Why? If President Donald Trump continued to increase tariffs on China, it would likely lead to a recession, which could hurt the incumbent’s re-election prospects, he said.

“It’s not exactly something that any president wants to run with. The incentive for President Trump is to dampen down the language on tariffs,” said Sosa, whose firm manages the Renaissance Flexible Yield Fund.

“We think the worst of the tariffs and the tariff-related language has passed, which means that the chances of a recession are probably slightly lower now,” at around 50/50.

That’s because the economy is still “a mixed bag,” with some sectors thriving while others lag, he said.

“Housing, for example, has been doing extremely well. Consumer confidence is still relatively good. You have a bunch of other indicators which are all flashing green: homebuilder confidence, existing home sales [and] durable goods.”

However, the manufacturing sector is declining. The U.S. Institute for Supply Management’s manufacturing purchasing manager’s index (PMI) recovered slightly to 48.3 in October. However, anything below 50 signals a contraction, and October was the third consecutive month below that threshold.

Sosa said the weakness in the manufacturing sector is the result of the U.S.-China trade war. As tariff concerns recede, those numbers should improve.

Interest rates are another factor affecting the economic outlook — and one President Trump hasn’t been shy about addressing.

The U.S. Federal Reserve has lowered rates three times this year, most recently in October, to a range of 1.5% to 1.75%. Fed chair Jerome Powell said Wednesday that the central bank will likely keep its short-term rate unchanged in the coming months as the economic outlook improves.

Sosa said that as the tariff threat recedes, “we would expect that we go back to more of a normal market environment, which means there will be less downward pressure on rates.”

Another factor that could affect economic growth and markets, however, is potential budget deficits. The federal deficit for 2019 hit $984.4 billion, the highest in seven years.

Sosa pointed to what he called some of the more “radical” proposals from candidates seeking the Democratic presidential nomination, including “Medicare for all,” free tuition and student debt forgiveness.

Elizabeth Warren, whose platform includes a 2% annual tax on household net worth between US$50 million and US$1 billion, above which it would rise to 3%, has emerged as a potential frontrunner.

Sosa said it’s unlikely that the more radical policies raised ahead of the primaries will pass. But if they did, “you’re talking about potentially multi-trillion-dollar deficits every year,” he said.

Still, the U.S. economy is in good shape compared to the rest of the world, he said.

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