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How Should Investors Ride a Potential “Blue Wave”?

With Michael Zezas U.S. Public Policy Research for Investors

Although the U.S. election is anything but predictable four months away, investors may still want to consider how markets would react to a Democrat sweep.

In this Thoughts on the Market series, Michael Zezas offers perspective on how U.S. public policy affects equity and fixed income markets, including trade tensions, infrastructure and government policy. Listen to this week’s update.

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Current Episode Transcript

As we move through the 2020 election campaign, a trend is emerging: a sizable lead in the polls for Joe Biden and an emerging lead for Democrats in key Senate battleground states. We get why investors might be skeptical these polling leads can hold up. After all, we're still months away from the election and the first six months of this year have already seen many events that could be considered political game changers: impeachment, a pandemic, and social unrest among them. Still, we don't think it's too early for investors to take seriously the idea of a "Blue Wave," where Democrats take back the White House and Senate.

Consider some of the underlying elements of recent voter surveys. A recent Pew survey showed that, since March, 17% of voters previously committed to Donald Trump now intend to vote for Joe Biden. One trait of this voter cohort? They tend to come from areas hardest hit by Covid-19. That's not surprising as this survey and many others show that Biden is net more trusted on the issue of dealing with the Covid crisis and unifying the country. More evidence comes from the polling firm "Morning Consult," which finds voters are more motivated by dealing with Covid than the economy, even among households where someone has recently lost their job. So it's a reasonable take that the ongoing rise of Covid-19 may keep the president at a polling deficit, even as the economy pursues a V-shape recovery.

So what does it mean for investors? Pay attention and look to turn market mistakes into opportunities. Markets may be dismissing polls for the moment, feeling burned by their faith in them in 2016, but that could change with time and more data. And if it does, it's possible the first market reaction will be negative as investors focus on the impact of policy headlines rather than plausible policy paths. For example, in health care, investors might fear that Medicare for all would hurt managed care companies. But you're more likely to get something like a public option or Medicare expansion, both fundamentally additive for these companies. In financials, investors might fear fresh regulation, but would be more likely to get a legislative focus on deficit-funded infrastructure and health care, two things that could drive money to households that make up a large portion of the customer base for money center banks. To learn more, you can now read our election preview on syitn.com.

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