The Stock Market Has a Lot of Money Riding on the 2020 Election

For better or worse, U.S. and global markets have become inextricably entwined with American politics ever since the 2016 presidential campaign. That shows no sign of changing in 2020, as investors grapple with a global economic slowdown triggered by President Donald Trump’s trade war, not to mention his potential impeachment, volatile geopolitics, and a crowded field of Democratic challengers, some of whom are threatening to upend the status quo in several giant industries. To many investors, it feels like the bull market that’s run for more than a decade is about to be tested by a new economic era. And the 2020 elections could determine what this next phase looks like.

The list of scenarios that could unfold in 2020 is dizzyingly varied. But many of the strategists, money managers, and economists who watch the markets are suddenly focused on what to make of the ascent of Warren. The implied probability of her getting the Democratic nomination rose above 50% in October, up from as low as 6% in April, according to the predictions market website PredictIt.

Her presidency and a Democratic majority in both houses of Congress—a bigger reach—may bring into play such issues as the Green New Deal, a national ban on fracking, and other policies that would put shares of energy companies among the most at risk, according to Calvasina’s survey of her bank’s analysts. Health-care, financial, and industrial companies are also at risk from Warren plans that include eliminating private health insurance, beefing up bank regulation, capping credit card interest rates, and cutting defense spending. “At some point, the market’s got to confront this because she’s not going to be good for asset prices,” Dean Curnutt, founder and chief executive officer of Macro Risk Advisors, told Bloomberg Television on Oct. 16.

But the thinking about Warren isn’t all bearish: While an increase in the minimum wage would hurt some profit margins, it also should boost consumer spending, as would a plan to eliminate student debt, according to RBC. Warren’s plan to break up big technology companies such as Amazon.com Inc. might hurt those stocks, but it could be a positive for the companies that have to compete with them. And steps to reduce inequality might spur more broad-based growth.

“The way the country is functioning today, the bottom 60% aren’t doing well,” said Michael Novogratz, a billionaire money manager who has supported Democrats in the past, in an October interview with Bloomberg News. “She’s speaking to that group,” he said of Warren.

Whether it’s Warren, another Democrat, or Trump who wins in November 2020, there’s the question of whether the U.S. and global economies will already be in a recession by then. The probability of a U.S. recession within 12 months remains stubbornly elevated at 27%, after approaching 50% at the start of 2018, according to a Bloomberg Economics predictive model that uses inputs from markets, corporations, and government statistics. “Of course there’s a recession ahead,” JPMorgan Chase & Co. CEO Jamie Dimon told reporters after the bank reported its latest earnings. “Is there going to be a recession soon? We don’t know.”

Analysts are not yet predicting doom and gloom for the corporate profits that matter most to stock market investors. Earnings per share for S&P 500 companies are projected to increase almost 10% in 2020, after lackluster growth in 2019 estimated to come in at 1.9%. Note that these growth figures have a habit of shrinking as the year gets under way.

Many investors have already assumed defensive positions, bidding up prices of utilities and consumer-staples companies that they hope will be resilient in a downturn, or parking more cash in money-market mutual funds.

On Wall Street, there’s something called the “pain trade”—a big market move, in either direction, that catches you off guard. It’s possible that 2020’s version of that will be a rally that relatively few investors are in a position to enjoy. “In general, I still think the pain trade is higher, due to excessively defensive positioning given very poor sentiment and fear of taking on risk,” says Gina Martin Adams, Bloomberg Intelligence’s chief equity strategist. The trouble with a pain trade is that it’s hard to have a plan for that. —With Amanda L. Gordon

©2019 Bloomberg L.P.