Bloomberg's Chief Equity Strategist Gina Martin Adams recently spoke with Jim Puplava to discuss her current market outlook. She explained what impact the 2020 presidential elections could have on the market as well as key issues to look out for. Gina also outlined potential policy mistakes and why she believes the chances for such mistakes are unusually high right now.
I don’t think anyone could have predicted the first half of 2020. Looking to the second half of the year, what impact do you think the presidential election will have?
There are a lot of key issues I think you want to consider in terms of the election. But again, I go back to my 2016 corollary, where stocks went through a very volatile period pre-election. There was a lot of turmoil with respect to the two very different candidates at that point in time as well. And it wasn’t until after the election where we finally got our relief rally. I wouldn't be at all surprised to see something similar. There are some very big similarities and there are very big differences on the part of candidates.
I’ll go through a couple of things we're certainly watching for. One is trade policy. What is rhetoric versus policy with respect to how we're going to navigate trade relations globally is probably going to be pretty consequential to corporate profitability.
Another thing to consider is tax policy. Will we see a rollback of corporate tax cuts? There’s already a plan for 2022 and 2023 with some rollback of the corporate tax cuts that were enacted in late 2017 going into 2018. What we see with respect to corporate tax policy is going to be really consequential to corporate profitability and could certainly create a lot of turmoil.
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Healthcare is another issue. It's obviously been a big leader in the market in 2020. Healthcare stocks have been roaring back after hitting a period of dormancy since the 2016 election season. Will we see major changes to how we pay for health care in this country going into 2021? How will the candidates approach health care?
The other thing I think you want to watch for and this is not necessarily related to the election, but really more related to the near term fiscal policy action. There's a possibility that we get either an extension of the unemployment benefits program or other programs designed to boost the economy sometime within the next several months.
Not necessarily related, but peripherally related to the election; will we get an infrastructure package? That’s something that I think we want to consider into the next six months. So, the election will matter. Certainly fiscal policy will absolutely matter. And let's not forget about monetary policy as well, because we're not completely settled on our monetary policy approach.
The Fed is still apparently considering potential yield curve control. What will that mean for the financial sector in particular? What will it mean for REITS and spreads that continue to expand the corporate bond practices, which is obviously very supportive of spreads and some of the lower quality companies in the S&P 500, so will that shift? There's certainly a lot to watch for with respect to policy action out of Washington, presumably impacting the equity market as well.
What are the chances of a policy mistake going forward?
I would say the chances are unusually high. However, I think if anything at this moment in time, our policy mistakes would be more geared to erring on the side of caution. If we make a policy mistake, in my opinion, it's that we hold on too long and we stimulate too much, and then fail to take it back fast enough. The result is a potential inflationary breakout.
I know that that sounds completely bizarre to talk about at this moment in time, given the deflationary pressures we're dealing with. But I do think at some point, you have to really consider how much do you need to take back? Because we've been fighting the quote unquote, deflationary crisis since 2008. That's a very, very long time to have extraordinary policy accommodation continuously infusing liquidity into the market.
I do have some questions as to at what point does that finally result in conditions that are entirely different and that we are completely unprepared for as an investor universe. I'm more worried about the monetary policy side than the fiscal policy side. I think oftentimes, it's much more difficult to get fiscal policy action. But on the monetary policy side I think you could very well see a confluence of events where we maintain extremely accommodative monetary policy for an extraordinary period of time. Where we wait a little bit too long for the economy to bounce back.
At the same time, companies are thinking about really altering their supply chain, diversifying their supply chain, which is going to inherently increase costs in the system. So you've got this combination of potential supply chain disruptions that are on a more permanent basis that keep constraints on supply and recovering demand. And the extraordinary monetary policy. This could create relate results in a lot of inflation volatility that we haven't seen in a considerable period of time.
Now, I want to keep my eye on the ball of fiscal policymakers, obviously. But even on that front, I think, if we're still struggling economically, it's incredibly unlikely that fiscal policymakers are going to come together and do something that is restrictive. If anything, the fiscal policymakers will remain too easy for too long. The implications of that could be found in the Treasury market as well as the dollar.
I think you want to keep an eye on policymakers and what they're doing broadly because we've been in this environment of extraordinary policy action. As an asset class, the equity market is absolutely more sensitive to a potential policy error than it has been in the recent past. It does make me somewhat uncomfortable; I definitely want to keep an eye on it. I'm not tremendously worried about it right now. But I do think you want to be somewhat conscientious about that fact.
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