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Election+Business
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Good afternoon. Coronavirus cases are soaring in the Sunbelt, the U.S. will withdraw from the World Health Organization and the economy is returning to the campaign’s center stage. Welcome to our weekly look at business and the 2020 election. I’m Theo Francis.
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Voters continue to cast ballots in primaries, including today in Maine, where they’ll use ranked-choice voting, and in Alabama, where former Attorney General Jeff Sessions tries to win back his Senate seat against Tommy Tubberville, a former college football coach.
This week, we take Wall Street’s pulse on the election, consider coronavirus infection rates in battleground states and talk to senior Washington correspondent Jacob M. Schlesinger about Joe Biden’s expanding economic proposals.
We would love to hear your feedback or ideas. Just reply to this email. And if someone forwarded you this email, you can sign up here.
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2020 Countdown
5 weeks to the Democratic National Convention.
6 weeks to the Republican National Convention.
11 weeks to the first presidential debate.
16 weeks to Election Day, Nov. 3, 2020.
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MASKED MAN. President Trump donned a mask in public for the first time on Saturday, to tour the Walter Reed National Military Medical Center just outside Washington. Covid-19 cases in the U.S. have continued to rise, prompting New York to track more visitors, Oregon to ban most indoor gatherings of more than 10 people and California to re-close restaurants, bars and other venues. Photo: Tasos Katopodis/Reuters
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Wall Street Gets the Blues
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🛎️ The Takeaway: Those playing the markets see a good chance that Biden will win and Democrats take Congress — and it doesn't seem to bug them as much as you might think.
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Joe Biden isn’t just up in the polls. He’s up on Wall Street, too.
The Street famously hates uncertainty. But at least for the moment, institutional investors and hedge fund managers have a consensus about the presidential election: Mr. Biden is the likely winner.
That’s a big change from the beginning of the year, when the Democratic primaries raged and before the pandemic stalled the global economy. Two big factors: Democrats have rallied around Mr. Biden and President Trump’s approval rating has been battered by the one-two punch of medical and economic crises.
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It helps that Mr. Biden hasn’t veered left as much as some feared (or some of his primary opponents hoped.) Wall Street sees what generally amounts to a centrist-left economic policy. Mr. Biden is working to make some of the progressives in his party happy, but he hasn’t gone over to them entirely. (The Wall Street Journal’s Gerald F. Seib describes Mr. Biden as seeking “that elusive economic consensus.”)
Prediction markets are expecting a sweep, giving it roughly 2 in 3 chances that a single party captures the White House and both houses of Congress. But the market sees the odds of a blue wave as more than three times those of a red wave, analysts at UBS figure.
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Whatever the outcome, UBS sees the election as neutral to positive for the stock market generally. A blue-wave scenario, where Democrats control everything, comes as slightly positive for the economy and neutral for stocks — fiscal expansion is likely to offset tighter regulations and higher taxes. (Only President Biden with a Republican Senate is negative, with increased regulation but limited fiscal stimulus.)
For fixed-income investments, UBS figures either a blue wave or a red wave is likely to mean inflation rises faster and rates come up. Everything else, even Mr. Trump defying the pollsters again to win another term, is essentially neutral.
Don’t read this as some kind of political sea change in the corridors of financial power. Wall Street loves low taxes and less regulation, which remains the message of the Republican Party.
But in recent decades, Wall Street has become an environment more driven by models than opinions. Certainty and stability overrule other factors. And so far, the Biden campaign appears to be offering a degree of certainty that Wall Street sees as positive.
Consider taxes. Under a Biden victory, there’s little question that taxes would rise. The 2017 tax law signed by Mr. Trump reduced taxes. Mr. Biden is proposing to erase some of that, which he stands a good chance of doing if Democrats also control the Senate.
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Corporate profits would likely take a hit: Moving the corporate tax rate to 28% from 21% would reduce per-share earnings by about 5%, UBS estimates. Goldman puts Mr. Biden’s entire tax program at roughly 12% in 2021— reducing per-share earnings for the S&P 500 to about $150 from about $170.
As a result, you might expect tax-sensitive stocks to be under pressure this summer — but so far, they aren’t, the UBS analysts found.
A Democratic sweep could bring significant changes to the U.S. health-care system, even absent Medicare-for-All. Those stocks are being hit in the market from a valuation standpoint, analysts say.
One interpretation: To Wall Street, the election matters — but the coronavirus is still more important. If the economy continues to struggle in January, as many economists expect, Democrats may not be able to raise taxes by much even if they want to. But if they want to change health care in the midst of a pandemic, or as it’s resolving, they absolutely could do it.
If Mr. Trump is re-elected, the Street is expecting more tax cuts, at least a modest infrastructure spending package and further deregulation. Uncertainty around the financial services and energy sectors would be resolved to their benefit. Interest rates and inflation could edge up. But most of these Trump Trade 2.0 effects would be more muted than during his first term — it amounts to more of the same, including U.S.-China tension.
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The market may be taking the prospect of a change in power in stride now. But there are signs of uncertainty ahead, courtesy of the options market, where investors can play the election months out without making a huge bet.
Futures-market contracts show investors expect high stock-market volatility around the election — more so than in 2012 or 2016, Goldman Sachs analysts note. That, coupled with recent delays in primary vote tallies and a likely surge in voting by mail, led them to recommend that investors structure election-related hedges to culminate not in November, but in mid-December.
— Geoffrey Rogow and Theo Francis
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Chart of the Week: Battlegrounds Twice Over
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Several political battleground states are also Covid-19 battlegrounds. Arizona and Florida have seen cases per 100,000 residents rise sharply in recent weeks. They now report infection rates higher than the U.S. average, after doing better for most of the pandemic. Nationally, increased testing accounts for about half of the rise in new Covid-19 cases last week, UBS analysts found. That’s down from 70% two weeks earlier. Death rates remain lower. At New York's peak, it reported just over 9,900 new cases a day with a roughly 13% death rate. With 25,000+ testing positive each day in California, Texas and Florida, the death rates were just shy of 1%, UBS said. “The magnitude of death could not be more different.” Treatments have improved and the latest wave is most pronounced among young people, who fare better. Mr. Trump carried some
battleground states by razor thin margins in 2016: 1.2% in Florida, 0.8% in Wisconsin, 0.7% in Pennsylvania and 0.2% in Michigan. In poll averages reported by Real Clear Politics on Friday, all six states leaned toward Joe Biden by 3.3 percentage points or more.
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It’s back. The pandemic is back on the campaign’s front burner as infections rage across the South and West. Full story.
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As seen on T.V. President Trump’s campaign and supporters are advertising heavily in states he won handily in 2016 amid concerns his path to victory has narrowed. Full story.
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Holding steady. The Trump administration won’t seek to change an Obama-era ozone standard, likely benefiting manufacturers and energy companies. Full story.
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More than 5 million people lost health insurance between February and May, 40% higher than the 3.9 million who lost insurance during the 2008-2009 financial crisis and recession, with Texas and Florida among those hardest-hit.
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A $600-billion program to aid small and midsized businesses during the economic crisis has been delayed by disagreements between the Federal Reserve and the Treasury over how risky loan terms could be.
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“Subpremium” beer sales are up and pricier beer is selling even faster — a continuation of trends that started during the last recession — but breweries are still suffering.
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Q&A: Joe Biden’s economic message
WSJ senior Washington correspondent Jacob M. Schlesinger talks about the presumptive Democratic candidate’s expanding economic plan, in conversation with Theo Francis.
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Last week, Joe Biden gave an economic speech in Dunmore, Pa. How much was new, and what does the speech tell us about his campaign’s economic message?
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The economy is a big issue, and one that Donald Trump polls better on. Mr. Biden has laid out a lot of economic proposals before Thursday. Most were either during the primary, which people have forgotten, or between then and now, when people weren’t paying attention.
So his speech wasn’t intended to be comprehensive. It started to lay out a roadmap of things to come, and it covered one element of four that his campaign is planning to focus on in coming months.
The bulk of the speech was restating things that he’d said before. One new element: He proposed $700 billion over 10 years in new money, beyond the $6.7 trillion he’s laid out before, according to estimates from Cornerstone Macro, an investment research firm. It breaks down into $400 billion in new government spending, largely of U.S.-made goods and U.S.-based services, and $300 billion to foster research and development.
The other new element is that he wrapped a lot of what he talked about in “Buy American” language. He’s probably said those words before, but now he’s putting it front and center.
He’s talking about increasing the degree to which the federal government must buy American-made goods. It’s a direct challenge to the president’s “America First” agenda. It shows he’s trying take on Mr. Trump in this economic nationalist sphere.
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Why is that significant?
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Business leaders looking at this election have been acutely aware that Mr. Trump is a protectionist and an economic nationalist. When it comes to Mr. Biden, they might hate his tax plan and his regulatory plan, but they know from his background that he’s a free trader and a globalist. For multinational corporations, that may be preferable.
He probably still is those things, but he made it clear his administration would also emphasize buying American. It’s a significant rhetorical shift. For people who hoped a Biden era would be a return to the old globalist past, this is a warning that it wouldn’t be.
In a background briefing for reporters the night before the speech, his advisers were asked whether they have a strategy for free-trade agreements. The advisers said a Biden administration would create alliances to take on China. That sounds like the Trans-Pacific Partnership treaty that Mr. Trump pulled out of early in his administration. But when they were asked about that, they said they weren’t making a priority of rejoining the agreement, and they’re going to have a deep look at investing in domestic manufacturers before doing anything on trade. It was a signal that free trade is likely to take a backseat to other priorities.
This is campaign rhetoric. It’s possible that, if Mr. Biden is elected, his old globalist tendencies will kick in.
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If both candidates are talking down globalism, how different are their policies on this front?
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The Biden campaign’s goal here is to say they share this notion of economic nationalism and making American manufacturing great again. One important distinction is that they say they will work more with allies — that it’s a more effective strategy to work with allies, especially to take on China, than to continue Mr. Trump’s go-it-alone strategy.
What does it mean to work with allies if they’re also closing federal procurement to, say, European companies? It isn’t clear. Rhetorically, I think what they’re trying to say is, Buy American. Their argument is that Mr. Trump talks tough on these things, but he hasn’t delivered. So they're saying they’re going to deliver in ways he has not.
Mr. Biden talks more about preserving alliances and restoring alliances — preserving global agreements like the Paris Accord on climate change, preserving Nato. There’s a big issue about whether Buy American is even compatible with World Trade Organization rules. They said everything they do will be compatible with WTO rules. Mr. Trump downplays the importance of WTO rules. Whereas the Biden people say whatever this new economic nationalism is would be executed in a way that still respects the existing international framework.
Mr. Trump has been very active in imposing new tariffs. Mr. Biden has not talked about that — it doesn’t mean he’d rule them out. When his advisers have been asked if they would lift tariffs, they wouldn’t go there. They said they’ll do a review of everything Mr. Trump did. They haven’t said they’d continue Mr. Trump’s strategy of continuing to add tariffs.
I don’t think they’re going to actively look to rip up the global trading regime the way Mr. Trump has done. On the other hand, Mr. Trump has already headed in that direction, he’s effectively neutered the WTO, set up a lot of new tariffs that are on the books. Other countries have done the same. I don’t think Mr. Biden will make it a priority to undo these things or restore the old order, because he has other priorities. I think you’d see a continued fraying of the old order, but not by active commission — it’ll just go to seed.
In some ways, it shouldn’t be a surprise that the Democratic Party might take this line. Republicans have traditionally been the free-traders, and Democrats have portrayed themselves as protecting American manufacturing. Mr. Trump really stole that message out from under the Democrats’ nose in 2016, not just as a rhetorical device but geographically. That’s a big reason Mr. Trump won Pennsylvania, Wisconsin, Michigan. It’s not a surprise that Democrats are trying to find a way to regain traction on that.
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Mr. Biden has signaled that other elements of his economic plan will depart significantly from the president’s. How?
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Mr. Biden wants to repeal the Trump tax cuts. He has a whole range of tax increases he would impose on corporations, on capital gains, on investments held by upper-income people. Another area where he’s drawing sharp distinctions is with racial equality and inequality.
Aides said Mr. Biden will be focusing on four main economic pillars in coming weeks. One was last week’s emphasis on buying American.
Another is scheduled for this week: more on his green-energy climate infrastructure plan. The campaign has already unveiled a $1.3 trillion infrastructure plan with a big emphasis on green jobs. I don’t know if the next announcement will be more money or more details.
The third component is what they call the 21st Century “care economy.” This centers on issues that have existed for a while, but have been exacerbated by the pandemic: It’s hard to get childcare; it’s hard to get elder-care; some people are squeezed by both of those things. The idea is to create a whole care infrastructure for the country.
The final pillar is racial equity. The campaign is talking about increased funding for colleges with predominantly Black student bodies, a new government agency to provide credit ratings and tougher enforcement of existing anti-discrimination rules, among other proposals.
Along with all of this, they keep talking about a pandemic recovery plan. To some extent, that’s baked into all the other components. They’re also signaling, look, we’re going to inherit a deep recession, this is our plan to jumpstart the economy.
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Wall Street and the markets seem to believe big tax increases are unlikely in an economic crisis, even if Democrats sweep the White House and both houses of Congress in the election. Is the campaign acknowledging anything of the sort?
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Rhetorically, no. Our colleague, Richard Rubin, wrote in late May that Democrats are sticking to a high-tax message. Presumably they think it still makes sense to raise it as a campaign point.
They do feel like raising taxes is a winning message. It’s leaning really hard into the inequality theme: There’s just this incredible imbalance, and we need to use the tax code to rectify it. With their base, that’s a winning message.
Mr. Trump keeps saying they’re going to kill the economy — that one way to destroy a recovery is raising taxes. It might be that Wall Street feels like they might want to but won’t be able to.
In the end, the question is: Do voters think bigger spending and higher taxes is a winning strategy for boosting the economy? Since Ronald Reagan, even for Democrats, the feeling was you had to be really careful about raising taxes.
Of course,it’s July. The election isn’t until November. Assuming Democrats do take over, they don’t take office until January.
One twist here is that people around Mr. Biden say he is obsessed with paying for things and not increasing the national debt. They say it’s hard to get the campaign to consider new proposals unless they pay for it.
So far, they haven’t proposed ways to pay for everything. But they say they will eventually cover everything they consider permanent spending. They don’t see the need to offset cyclical spending to combat the economic crisis and the pandemic, which is a classic Keynesian approach — if you offset recessionary spending immediately, it won’t stimulate the economy.
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Senate Republicans have been warned to step up fundraising after Democrats out-raise them by $30 million in the first quarter. (Politico)
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Small-business owners, facing new lockdown orders, are increasingly shuttering their businesses instead. (New York Times)
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President Trump could raise $10 million with an in-person Florida fundraiser on Friday, hosted by the head of Wisconsin-based Link Snacks Inc. (Reuters)
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Democrats and Republicans in Washington want to extend unemployment aid — but disagree on how, and how much. (Roll Call)
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More high-profile Republicans say they will skip the party’s nominating events in August, but others are eager to go. (New York Times)
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A new healthcare crisis is looming as patients postpone other medical care during the pandemic. (Reuters)
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