At a recent event at Milwaukee’s Harley-Davidson Museum, the Insurance Division at Johnson Financial Group hosted clients to hear how the current political landscape and election cycle could impact their businesses and the economy in 2020 and beyond.
The political backdrop
J.P. Wieske, executive director of The Health Benefits Institute told the crowd that, while Sen. Bernie Sanders’ campaign for the presidency may be in its final few weeks, Vice President Joe Biden is well on his way to sewing up the Democratic nomination. He predicted that Biden’s fortunes against President Trump this fall would hinge on two factors, the state of the economy heading into November and voters’ feelings about their competing visions for healthcare. As for Congress, he doesn’t expect much significant policy-oriented legislation to be taken up in the near term, especially with the added distraction of emergency measures due to coronavirus. Similarly, the biggest legal threat to the Affordable Care Act, Texas v. Azar, is unlikely to be decided by the Supreme Court before the election.
Wieske said he thinks the congressional elections will be tied to turnout for the presidential election and, once again, voters’ views on the direction of healthcare policy. He noted that Republicans have a disproportionate number of seats to defend in the senate but said the most likely outcome in the event of a close presidential race is continued divided control of the two chambers of congress. Wieske also shared insights into political movement around big data, the technology associated with self-driving cars, and insurance innovations.
Follow the news for your investment portfolio, but avoid impulsive reactions
Johnson Financial Group SVP, Director of Equity Strategies Jason Herried advised attendees to avoid impulsive reactions to coronavirus-related market volatility and the ups and downs of the 2020 election and instead stick to their financial plan as a roadmap amidst the uncertainty. The market selloff in response to the spread of coronavirus was sharp and swift, and the severity and duration of the pandemic are not yet known. But Herried argued that policy measures taken after the last major economic shock—the 2008 bursting of the housing bubble—have vastly reduced systemic risks in the financial system. Global central banks, too, have become more effective at calming roiling markets with well-timed and well-placed injections of liquidity.
The market’s virulent blind spot
While electoral politics can be expected to be a major financial story for the balance of the year, the big near-term story is the coronavirus pandemic and its impact on global commerce and, by extension, financial markets. Herried noted that the VIX volatility index in the first half of March was often trading in the 40-50 range, implying significant volatility and expectations that broad stock indexes would experience intraday moves of about 3%. The VIX typically trades around 15.
While the economic impact of the virus can already be measured in China—where the country’s purchasing manager index, which usually hovers around 50, has fallen to a record low 38—Herried said its practical impact on the U.S. economy, which had been in a long phase of steady but tepid growth, is unclear. While U.S. markets may take time to find a bottom, he said the virus could just as easily prove short-lived and, perhaps with an assist from fiscal and monetary stimulus, the market may rebound back to pre-coronavirus levels.
Liquidity trumps growth
While the recent volatility reminds some of the dislocations of 2008, Herried said there are some important structural and economic distinctions:
- The 2008 crisis was the result of the bursting of a major bubble in housing and subsequent deleveraging of consumer and corporate balance sheets, whereas this downturn is driven by an exogenous factor, the coronavirus. (It also bears mentioning that the initial market selloff was exacerbated by another outside shock, the plunge of oil prices when Saudi Arabia and Russia declined to curtail production.)
- The macroeconomic picture is stronger by many measures: GDP growth is comparable to 2007/2008, inflation is in check and unemployment is at record lows. Even manufacturing, which has been relatively weak compared to the services sector, was beginning to show an uptick going into the health crisis.
- The structural changes that were put in place after the market dislocations of 2008 reduced systemic risk in the global financial system. While the selloff has been painful to watch, it has also been remarkably orderly so far, with no signs of trouble in the banking system and stock market circuit breakers kicking in to buffer panic selling.
- Central banks have more experience than they did in 2008 ensuring liquidity—whether through interest rate cuts or more surgical actions such as the Federal Reserve’s intervention in the U.S. repo market—and are proving they can move quickly in response to fast moving markets. Moreover, through relationships and lines of communication forged 12 years ago, central banks are intervening on a more coordinated basis.
We know what we don’t know and that we eventually will know
While there are still a lot of unknowns regarding both the political direction of the country and the duration and depth of the pandemic, Herried said the one thing we do know is that we soon will have better clarity on both. In the meantime, he recommends that investors avoid responding emotionally, stick to their long-term plan and work with their trusted advisors to prepare for the opportunities ahead.
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