With Election Day coming in less than two weeks, and earnings season currently underway, we're getting a bit of a look into how companies are dealing with the uncertainty around the election.
No company knows right now who will be President in three months but earnings reports can shed light on what they are predicting about the economy going forward. Guidance has been difficulty for most of 2020 due to the uncertainty caused by the massive shockwave coronavirus has sent through the entire economy. Firms can't accurately predict how COVID-19 and its side effects will impact the overall economy, let alone their own businesses. There is more stability now than six months ago but markets remain volatile.
Now with an election coming up, companies are forced to account for even more variables.
How Might the Election Change the Recovery?
Right now Democrats are expected to have a strong election year with many polls predicting that the Dems will have a clean sweep of the White House, Senate, and House of Representatives or at least two of the three. This actually happening is far from certain but currently seems like the most-likely outcome if the polling is correct (big assumption). Most companies are vaguely referring to the election as another cause for uncertainty and are trying hard not to be seen as predicting or favoring a particular outcome.
Moody recently published an analysis on predicted recoveries in multiple election outcomes and a Democratic sweep or majority both had higher expected real GDP growth over the next 10 years. Most companies are hoping for additional stimulus that is more likely to pass with a Democratic-led government. Government debt would continue to skyrocket in this scenario but the short term effects on the economy may outweigh this costs.
What are Banks Saying About the Election?
Most major banks have already had their third-quarter earnings calls and the discussion around elections mostly revolved around uncertainty and changes to the yield curve. Evercore’s (EVR) Ralph Schlosstein said, "the elections, while they're certainly on a lot of people's minds, haven't really affected deal activity in any material way, except for one, which is in a handful of privately held companies, there has been a desire to transact before the end of the year." Mostly due to new variables such as a possible change in the tax code going forward.
Multiple financial institutions focused on the yield curve and how elections might change the speed at which it steepens. For example, Eric Howell from Signature Bank (SBNY) said "We are investing in the securities portfolio, although we continue to be selective given the elections that are coming up and the potential for a spike in rates there. So we're being a little selective until after the elections."
Additionally, Regions (RF) David Turner said, "taking those cash flows and reinvesting them in this kind of rate environment where the 10 year is at lower -- at 70 whatever basis points today, it's tough to make money. And so if we can get a steepener going, which we think we can with infrastructure spending, again, it doesn't matter who really wins the election on that, maybe the Democrats do it quicker, but we'll see. But I think a steepening yield curve is what we like to see, but flat is bad."
Both of these companies explained a hesitance to invest in this environment given extremely low interest rates. Rates for long-term lending are at historic lows, which makes those investments unattractive if there's any expectation of inflation in the future.
In Conclusion
The main focus for companies right now is additional aid that can be provided by a new stimulus bill. The government and Fed have already done plenty in response to this virus and should be commended for their quick response. However, there remains a contentious debate about whether enough has been done or if more aid should be passed.
The recovery has certainly slowed down in recent months after many of the CARES Act policies ended in July. A healthy, growing economy cannot be created entirely through policy decisions and regulations, but they are effective tools either in times of crisis, whether it is a pandemic or global financial collapse. The yield curve is always going to be a crucial factor, particularly for banks, given that not many institutions are looking to risk their money for very low returns.
