September 1, 2020 – In a research note released yesterday, J.P. Morgan analysts Marko Kolanovic and Bram Kaplan postulated that Trump’s reelection chances are increasing and the impact on investment sectors may be “dramatic” as investors are mostly predicting a Biden win.
Five months ago, economists were debating on whether the post-COVID19 recovery would be a “U”, “V” and “W” shape. Messrs Kolanovic and Kaplan have concluded that the economy is experiencing a “K” shape economy:
In fact, if one were to imagine measures that would help large cap tech stocks the most, the COVID-19 response delivered it all. Populations largely confined to their homes have to socialize, work, shop and be educated online. The use of devices, cloud and internet services was bound to skyrocket while the rest of the economy took a nose dive (airlines, energy, shopping malls, offices, hospitality, etc.). This has created enormous inequality not just in the performance of economic segments, but in society more broadly. On one side, tech fortunes reached all-time highs (e.g. see here), while lower income, blue collar workers and those that cannot work remotely suffered the most.
Citing betting market predictions, the analysts noted that President Trump’s betting odds (for re-election) started improving in August, likely due to the increased violent social protests, which some experts believe repel moderate voters. In addition, the analysts believed the prevalence of social media usage will accentuate themes that will benefit Republicans generally and President Trump.
Citing studies by Leib Litman – a psychologist from City University of New York – and colleagues, the analysts noted that roughly 10% of Trump voters were not honest when responding in polls.
Research suggests that the reasons for this include voters being afraid of reprisal (e.g. job termination) if their voting intentions are revealed, and others trying to ‘throw off’ polls. It should not come as a surprise that this effect appears to be stronger for Republican voters given the liberal trend of ‘cancel culture’. Applying the findings of Litman’s research to the current breakdown of likely voters (Democrats, Republicans, independents, as well as Republicans voting Democrat and vice versa), we find that this ‘cancel culture’ effect could artificially skew polls in favor of Biden by 5-6% (i.e. overstate support for Biden).
The JP Morgan team believes investors are mostly positioned for a Biden win, thus market fluctuations may be forthcoming for many industries as well as ESG investing.
BuyMuni spoke to a seasoned municipal analyst at a $250M+ New York fund, who opined that a Trump re-election would be ominous for municipal bonds, as many Blue state issuers are “barely hanging on” based on current tax revenues and are relying on a “Fed bail out once/if Democrats assume control of the White House and Congress”.
Assuming Trump wins and the Senate remains in GOP hands, drivers that are conducive to Blue state recovery – infrastructure spending, direct stimulus to individuals and small businesses, Medicaid supplemental aid and a repeal of the State and Local Tax (SALT) deduction – will likely fail to take place, further pressuring the coastal states to cut services and potentially enter into a spiral of low demand and accelerated out-migration.
Contact Kyle Skinner at KSkinner@buymuni.com
