Coronavirus catches Donald Trump off guard

The coronavirus pandemic is now also steamrolling the United States these days. It has already put an abrupt end to the decade-long equity bull market there, and it soon looks set to plunge the world’s largest national economy into a recession. This means doubly bad news for the US president, who has shown himself to be blatantly out of his depth in dealing with the public health crisis. At the least, Donald Trump’s chances of winning reelection have worsened to some degree, but that isn’t necessarily bad for the financial markets.

It’s the economy, stupid

The coronavirus knows no national borders. With a slight time lag, but with all the more ferocity, the pandemic has now also arrived in the USA. With more than 140,000 new infections at last look, the number of confirmed cases in the USA has already far surpassed the case count in China and Italy in the meantime. The economic impacts of the public health crisis have by now become inestimable. Last week, a record 3.28 million US citizens filed initial claims for unemployment benefits. Sentiment has plummeted, not just in the manufacturing sector, but also in the economically more important services sector. In the wake of a record-long economic expansion, the world’s largest national economy is now suddenly facing a recession this year. The only question is how long and severe the recession will be. Members of the analyst community are currently one-upping each other with GDP contraction forecasts ranging from –2% to –5%.

This is indeed not good news for US President Donald Trump and his chances for a second term in office. Former president Bill Clinton’s political strategists knew what really matters when it comes to winning US presidential elections: “It’s the economy, stupid!” In other words, when the economy is firing on all cylinders, Americans are trustful of the incumbent and are gladly willing to grant him four more years in the White House. During such times, the election challenger has a tough row to hoe. But the picture looks completely different when the economy is going through a recession. No US president since Teddy Roosevelt in 1904 has won reelection during a recession.

Standstill
Unemployment looks set to explode

Initial claims for unemployment benefits

Looming lame-duck presidency?

Can President Trump still turn the tide? Probably only if he proves his skills as a crisis manager in the weeks ahead, for voters are also reluctant to replace a good crisis manager in troubled times. Political experts attribute the reelection of George W. Bush, for example, largely to his growing popularity in his role as the leader against terrorism in the aftermath of 9/11. President Trump, however, has frequently seemed overwhelmed in recent days by the coronavirus situation. He long denied the existence of a public health crisis and thus squandered precious time. Even up until recently, he wanted to end the lockdown preferably today rather than tomorrow against the urgent advice of his advisors to extend it.

From a geopolitical perspective as well, it would be desirable for Donald Trump to consider himself still in the race for the upcoming presidential election. Otherwise the sitting president could become a lame duck, which would present a risk in its own right. If President Trump thinks that he is losing the support of voters, that might give him an incentive to use the power of the presidency in his final months in office to cement his legacy. He then perhaps would move to assert the USA’s long-term national interests without thinking about or paying regard to the adverse economic consequences.

Will the stage enactment succeed?
Donald Trump has better election odds in a role as “crisis manager”

Job approval rating

(Electoral) prospects for the equity market

Even though the statistics clearly argue against him, one shouldn’t write off Donald Trump yet at this early juncture. Because for one thing, his Democratic adversary, Joe Biden, is widely considered to be a relatively weak opponent. Moreover, President Trump can trumpet the roughly USD 2 trillion economic stimulus package that was recently passed as a success on his part for now. In any case, his job approval rating as president has picked up significantly since the passage of the new relief measures. A second Trump election coup on the heels of his victory four years ago, which took many experts by surprise, cannot be ruled out as of today.

Back to square one
Horrid performance for the “stock-market president”

Stock-market performance during Donald Trump’s term in office

A second Trump administration would arguably be a double-edged sword for the equity markets.

A second Trump administration would arguably be a double-edged sword for the equity markets. Higher taxes wouldn’t loom. Quite the contrary, in fact, the freshly reelected president might even feel inclined to pursue additional tax cuts to accelerate the economy’s recovery from the coronavirus shock. And a quick end to “QE4ever” – unlimited buying of securities by the US Federal Reserve – is also hardly imaginable under a Trump presidency. The likelier scenario is a further intertwinement of monetary and fiscal policy that would leave the Fed permanently financing the USA’s huge public deficits. On the foreign policy front, however, the trade war with China could enter another round, and Europe could also move back further into the crosshairs. In any case, the coronavirus crisis is giving the ongoing trend toward deglobalization another shove forward at the moment. And Donald Trump is likely to be susceptible to the temptation to claw back lost economic growth from the USA’s trading partners.

But what if the statistics prove right and the recession sweeps Donald Trump from the White House? Geopolitical risk would probably diminish in that event. The Democrat Joe Biden would likely undertake efforts to repair the fractured alliances with the USA’s former partners. And under the moderate Joe Biden, investors wouldn’t have to fear “leftist fantasies” like the breaking up of internet giants, for example, that would have loomed under Bernie Sanders or Elizabeth Warren. However, an increase in corporate taxes and stricter regulation would definitely be on the agenda. But since the US equity market has already corrected by 30% this year, we think that these baseline risks associated with a Democratic administration are already largely priced in.