Right now both Moody’s and Goldman Sach’s proprietary political models say that Trump is favored to be reelected, as are all incumbents who run in a decent economy.
Goldman’s model estimates that Trump needs 2% GDP growth to be favored to win the 2020 Presidential election, which Moody’s model agrees with.
Following the phase one trade deal, Goldman has boosted its 2020 GDP growth forecast to 2.5%, which bodes well for Trump’s chances, if accurate.
Moody’s model has correctly predicted the presidential winner every time since 1980 with the exception of 2016 when unexpected turnaround patterns caused it to miss Trump’s initial election.
But while there are many factors that can decide who wins any given presidential race, there is one that is likely to determine whether or not Wall Street’s preferred candidate actually comes out victorious.
This Election Is Likely to Be Mostly About Jobs
The political models that Goldman and Moody’s use measure many aspects of the economy but the one thing that’s kept US growth surprisingly high in the face of so much trade uncertainty has been strong consumer spending. 65% to 70% of the economy is driven by that and consumer confidence has been stronger than many feared it would be, due to the strongest job market in 50 years.
(Source: University Of Michigan)
The preliminary December consumer confidence survey showed a lot of political polarization with Democrats feeling a lot worse about the economy than Republicans.
While the implications of the economic expectations of Democrats and Republicans are clearly exaggerated, the Independents, who represent the largest group and are less susceptible to maintaining partisan views, hold very favorable expectations, indicating the continuation of the expansion based on consumer spending.” – University Of Michigan Consumer Confidence Survey
Fortunately, independents tend to have far more objective views and care primarily about how strong the job market is. November’s blowout jobs report boosted December confidence and the phase one trade deal is likely to increase that a bit more.
Small businesses, who have less exposure to tariffs than large multi-nationals, are also relatively optimistic. In November the NFIB reported the single biggest confidence spike (in 7 out of 10 measured metrics) since May 2018.
(Source: National Federation of Independent Businesses)
The phase one trade deal, expected to be signed in the first week of January, will be the first time US/China tariffs fall in 20 months. Goldman Sachs and Jeff Miller estimate the phase one deal should boost 2020 GDP growth by 0.2% and 0.3%, respectively.
According to NFIB chief economist William Dunkelberg, this historic run may defy the expectations of many, but it comes as no surprise to small business owners who understand what a supportive tax and regulatory environment can do for their companies…As the two-year anniversary of the Tax Cuts and Jobs Act’s passage approaches this month, small businesses, the world’s third-largest economy, are using those savings to power the American economy.”
Small businesses especially have loved the Trump administration’s penchant for deregulation and lower taxes. Right after his election, small business confidence spiked to the highest level in 11 years and it peaked at all-time highs in 2018 after tax reform passed and before the trade uncertainty began to weigh on economic results (growth peaked in October 2018).
The good news for Trump supporters or people like myself (an independent who always roots for a strong economy) is that the recent phase one trade deal and strong jobs data is likely to continue driving strong consumer spending.
Remember that independents tend to determine the trend in consumer spending and in November, before the phase one trade deal, 55% of independents viewed the economy as good or excellent.
But what exactly are the jobs/wage trends likely to be in 2020 and what does that mean for Trump’s reelection chances?
Macro-Economic Conditions Are Trump’s Friends… For Now
I’m not partisan and have no interest in endorsing any candidate or trying to tell you who to vote for.
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” – Ben Graham “The Intelligent Investor”
My goal is to provide the best evidence-based analysis about what’s likely to happen, and then make reasonable and prudent recommendations that can hopefully help you reach your financial goals.
According to Schwab 107K net jobs are needed each month to keep up with population growth. So far in 2019, we’ve averaged 180,000 and 205,000 over the last three months.
Remember that Moody’s and Goldman’s election models, which have historically been highly accurate, say that 2% growth favors the incumbent.
The current 2020 consensus among the 15 most accurate economists tracked by MarketWatch is for just 1.5% GDP growth this year. That implies Trump could be in trouble.
The phase one deal is expected to boost 2020 growth by 0.2% (per Goldman) or 0.3% (Jeff Miller). If we achieve 1.7% to 1.8% growth then it becomes a virtual coin flip.
But this is where the job market might prove the most important deciding factor. Goldman is estimating that unemployment hits 3.3% at the end of 2020 and wage growth rises from 3.1% now to 3.5%. Non-supervisory wage growth (80% of workers) might be 3.8% to 3.9%, the highest level in over a decade.
(Source: Atlanta Fed)
How many monthly jobs are necessary to achieve 3.3% unemployment by election day? About 150,000 per the Atlanta Fed’s job calculator. If we hit 171.5K per month then 3% unemployment is likely.
|Unemployment Rate By Election Day||Average Monthly Net Jobs Needed|
(Source: Atlanta Fed)
In the best-case scenario for Trump phase one trade deal optimism leads to slightly faster job growth in 2020, resulting in 2.7% unemployment and 4+% wage growth by November.
That would almost certainly result in stronger consumer confidence and a pickup in retail sales and business investment, both at large companies and small businesses.
In reality, the labor participation rate is likely to climb higher as wage growth rises, and unemployment is likely to be 3.1% to 3.3% by election day. But that is still sufficient to possibly boost overall economic growth to 2% that Moody’s and Goldman say gives Trump an edge come November.
What about U6 unemployment, the most accurate measure of the US job market? Well, that also should benefit Trump if only because it’s been falling steadily for a decade.
What About the Electoral College Swing/Swing States?
It’s true that in terms of the electoral college Trump is beginning behind, with just 204 safe electoral votes to the Democrat’s 248. That’s based on the consensus of the four leading political forecasters using state by state analysis.
But Trump’s odds go up when we consider the only six states that are likely to matter in November. Two of them are red states, and there are 13 total combinations of how those states can break. In six of those Trump wins or ties. A tie results in the 2020 House voting for the President with one vote per state.
The GOP currently controls 26/50 states and that’s expected to still be the case in 2020. In other words, the electoral college gives the Democrats just a small 54/46 edge in 2020.
But we can’t forget that who the Democratic nominee is will likely make a big difference in close swing state elections.
Biden has consistently led throughout the primary process and currently has a 9% lead over Sanders, who has overtaken Warren for second place.
However, the actual winner of the Democratic Primary will be decided based on state by state delegate contests, with a 15% cutoff to get any delegates at all.
State Primary Races
Here are all 34 state primary polls with the only five candidates that pick up any delegates at all (Kobuchar gets 15% in her home state of MN).
What does that breakdown to in terms of actual delegates?
Delegates per State
|% of Delegates In These States||54%||25%||15%||3%||1%|
|% Of Delegates Needed To Win Nomination||90%||41%||25%||5%||1%|
Unless the polls drastically shift in the coming months, Biden appears poised to take over 50% of the delegates in these 34 states. States that represent 83% of the total delegates and which get him 90% of the way to the nomination.
In head to head Trump vs Biden polls it’s a statistical tie (5% margin of error) in all the swing states except PA.
If Biden does win PA then Trump has just one path to 270 electoral votes, which is to sweep all the remaining swing states.
Those swing state head to head polls will likely change but how much will depend on
- Trump’s estimated $1 billion war chest (for ad spending)
- the state of the job market in those particular states
So you can see why it’s likely to be a far closer race than many currently believe if you just use overall economic data-based models (like what Goldman and Moody’s are doing) or national head to head polls.
Bottom Line: The Jobs Market And Wage Growth Is Likely to Be the Deciding Factor in Critical Swing States That Trump Needs to Secure Reelection
No one can predict how the economy will be doing on election day, especially in the crucial swing states. What we can do is look at the latest economic data which has been better than expected. Combined with the phase one trade deal, this might be sufficient to boost Trump’s chances to 50/50.
The steady decline in unemployment and rising wages, especially among 80% of workers (Trump’s blue-collar base) is something that will benefit his odds, which have declined due to the trade uncertainty of the past year.
Political junkies will want to put on their economist hats in the coming 11 months to watch how the job market will react to the positives coming out of Washington in recent weeks.
A strong job market that results in high wage growth and a return of consumer confidence (among independents) to near-record highs would indeed mean that Trump would be slightly favored to win.
A job creation slowdown (companies are having tough times finding qualified workers) could swing things in Biden’s favor.
How is Wall Street likely to react? Traditionally stocks tend to trade flat for the first half of the year, due to high election uncertainty.
During the second half of each election year stocks tend to perform the best as uncertainty falls, regardless of who actually wins. While past performance is no guarantee of results in any given year, the fact is that in just four election year did stocks fall, and all corresponding to recession years.
That bodes well for investors in 2020, regardless of who wins the election, and is a major reason why I don’t recommend anyone try timing their portfolio buys/sells around who they think will win the race for the Whitehouse.
SPY shares were trading at $320.01 per share on Wednesday morning, up $0.44 (+0.14%). Year-to-date, SPY has gained 29.83%, versus a 29.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Adam Galas
Adam has spent years as a writer for The Motley Fool, Simply Safe Dividends, Seeking Alpha, and Dividend Sensei. His goal is to help people learn how to harness the power of dividend growth investing. Learn more about Adam’s background, along with links to his most recent articles. More...
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