2020 Election: Prediction Is Difficult

Photo by Joshua Woroniecki

“. . . especially about the future.” — Neils Bohr

I wish I could write two columns, one that would be published if Biden wins the election and another if Trump wins. But this article, which will first appear on November 4, is being written weeks in advance. So you, dear reader, have an enormous advantage over me. You know what happened.

By now you know whether Biden won, Trump won, or if the election is undecided. And even if “undecided” is the temporary situation as you read this, you may still want to read what things might look like under either president once things get sorted out.

First Things First: “It’s the economy, stupid!” —Bill Clinton

This year we experienced the worst recession since the Great Depression, but it was also one of the shortest. The official end date for the recession has not yet been set, but there’s no doubt that we are out of it—and also most of the way back to where we were before the recession.

Recessions end at their lowest point, when the recovery begins. During recovery, things will always be worse than before the recession started, but as long as the economy keeps growing during recovery and beyond, we are not in recession.

On October 29th, the Commerce Department released the estimate for the 3rd quarter GDP. I’m stuck with guesses because I’m writing this before that report, but the best estimates are that the 3rd quarter of 2020 saw some of the fastest economic growth ever reported, with a growth rate at 30 percent or more.

Now that figure looks much better than reality—because the growth rate wasn’t 30 percent or more for just one quarter. It gets reported as an annualized number. So if the actual growth rate for the quarter was 8 percent, then it gets reported as 32 percent, which is what you would get if we grew by 8 percent for four quarters.

And 8 percent is terrific, if that’s what the number turns out to be. Let’s run with 8 percent for a moment. The economy fell a little bit more than 8 percent in the 2nd quarter. So we’ll round that down to 8 percent. If the economy fell 8 percent and then grew 8 percent, are we fully recovered? Nope! 100 minus 8 percent is 92. And 92 plus 8 percent is 99.36 percent. So almost, but not quite.

And that last little bit is going to take a lot longer. The reason is that most of it is in the travel and leisure sector. Airlines, hotels, cruise lines, restaurants, bars, movie theaters, etc., are all waiting for the pandemic to end. I expect three or four quarters to show growth, but at a dramatically slower pace. I think it will be more in line with pre-pandemic growth rates of a little over 2 percent per year.

Interestingly, whichever person we elect as president doesn’t change this forecast much. But if Biden wins, then it matters a lot which party controls the Senate and the House of Representatives. The Biden economic plan is stimulative. If his party controls both houses of Congress, then he’ll probably get it all passed, and that would create the most growth of all possible election outcomes. So for our economic well-being, I hope that you are reading this knowing that there was a blue sweep.

If Biden Wins

Initially, the stock market won’t like it. The reasons are simple and obvious. A Biden administration will change things, which creates a lot of unknowns for businesses and investors. We all fear the unknown. And Biden has clearly stated his intent to raise corporate taxes from the current 20 percent up to 28 percent. That will have a direct negative impact on corporate profits.

But after the initial adjustment in price, next year can be expected to be pretty good for both the economy and the stock market. More on that below.

If Trump Wins

The initial reaction of the market should be positive, because a Trump victory means a continuation of current policies. The known will be seen as stability and preferable to change.

Next year I would anticipate a continuation of the economic recovery, but I do not think it will be as robust as it could be under Biden, and therefore the stock market will not be as strong as it could be.

Finally, I thank YCharts for the research and this graphic. They looked at stock markets under Republican and under Democratic presidents going back to 1950. Here’s what they found:

For some reason, investors initially prefer Republicans, as demonstrated by the fact that between election day and the inauguration, the stock market has done better when a Republican is elected. This is rather odd, because as you can see, stock market returns have been more than twice as good under Democrats than under Republicans over the last 70 years

Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, Inc is at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/ Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated. Comments and questions can be sent to hal.masover@emailsri.com. These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results. Indices mentioned are unmanaged and cannot be invested in directly.