The first National Convention of the Democratic Party was a three- day affair held in Baltimore in 1832 with delegates attending from every state except Missouri. The incumbent president, Andrew Jackson was nominated for a second term, and former Secretary of State Martin Van Buren of New York defeated John Calhoun to become the vice presidential running mate. The delegates adopted a platform and a number of rules that led to a framework that has since been used by all parties every four years. But over time, delegates could never have contemplated conventions like the ones we are having in 2020 with pre-taped videos, Zoom, empty ballrooms, no hats, no balloons, no streamers, buttons, pennants or cheers, no visible runners or horse-traders. There are 4,750 delegates to the four-day Democratic convention concluding this week. Next week’s virtual Republican convention will include an estimated 2,551 delegates.
For the financial markets, Election Day cannot come soon enough. Traders and investors loathe uncertainty yet, between the pandemic and the polling, the country is enveloped in it right now. Everyone from the top CEOs at investment banks to the young worker just starting to build a retirement account is now speculating on how they will be affected by the November 3 results – if there are results available that night or soon thereafter. If there are widespread ballot integrity issues and we have a repeat of the Bush-Gore contest from 20 years ago with recounts and litigation and unclear outcomes lasting for 34 days or two months, all U.S. markets could slide. It is hard to imagine a contested election lasting beyond Inauguration Day on January 20, 2021, but we have recently seen a lot of developments that were heretofore unimaginable. Two of the more likely possible outcomes would have the greatest impact on stock, corporate, and commodity market volatility for several months, in our view. Under several scenarios, we would also expect some temporary spikes in Treasury prices and yields as the world digests the victories and losses. The steady performer, in our opinion, will likely be municipals. Let us take a minute to explain why.
In a scenario where the incumbent president is re-elected and the House and Senate remain under current control, we anticipate more partisan gridlock blocking further efforts at tax reform. SALT state residents as well as earners in most income brackets will continue to present strong demand for tax-exempt bonds and nontraditional buyers attracted by the yields and credit quality of taxable munis versus corporate credits badly battered by coronavirus will buoy prices. State and local cries for pandemic recovery aid could produce an infrastructure bill with authorization for a national issuer/guarantor or perhaps a subsidized taxable muni product that will prove to be interest to both domestic and foreign buyers. With the Fed remaining in its role as backstop for all markets and protector of liquidity, equities should continue to rally, Treasuries remain in heavy global demand, and municipal yields remain low, bolstered by favorable technical conditions.
Should a new president be elected with control of the House and Senate unchanged, partisan gridlock will thwart attempts at most major policy reversals. Markets would expect a new series of executive orders and actions in the realm of trade, health care and the environment but we can also see the lingering effects of the pandemic likely producing by necessity an agreement on infrastructure as well as state and local aid. This is a neutral to positive environment for municipals but other markets should expect unstable conditions for several months as the details of Democratic priorities and initiatives are rolled out and dissected.
A new president with control of both houses of Congress and a clear mandate would probably lead to action on tax increases, health care reform, tighter environmental regulations, and major stimulus for state and local governments. Nothing happens overnight, but the markets are forward looking and will likely overreact right away. Assuming the absence of another Black Swan, changing fiscal and tax policies are likely to produce prolonged municipal rallies. Demand could be dampened in several states if the state and local tax deduction cap is lifted. But the most volatility would likely be seen in stock, commodity and other markets as new policies take shape and ramifications considered.
Should the incumbent be re-elected and have control of both houses of Congress there might be a clear mandate for further tax reform and the further loosening of regulations, all favorable to equity and commodity markets. Munis could become less attractive. However, there is a wide enough range in philosophies within the Republican party such that consensus on taxes, health care, spending, trade, immigration and other thorny issues may not be so easily reached. In any event, we would expect that pandemic-driven needs for federal assistance will help bolster state and local credits, permit the return of tax-exempt refundings and raise yields enough to offset any loss of interest in tax-exemption as a result of any further tax cuts.
There are 75 days to Election Day. Back in the here and now, investors are focused on the end of summer, very basic back-to-school issues, high-priced assets, and record-setting debt levels and new issuance. Month-to-date investment grade corporate issuance already totals $110.5 billion and high yield corporate issuance so far in August exceeds $47 billion. The U.S. Treasury is on track for a record refunding this month; debt issuance was $2.753 trillion in the second quarter and $947 billion is planned this quarter. The federal government is projected to have a budget deficit of $3.7 trillion during the fiscal year about to end on September 30.
So far this month, equity gains have reversed all the losses suffered since the coronavirus sell-off in March. The Dow is up 5.1% in August, the S&P 500 has just hit an all-time high, and the Nasdaq has gained 4.3%. Oil prices are up 6.5% to $42.89 a barrel and gold prices have climbed 1.6% to $2,006 an ounce. Treasuries have weakened; the 2-year yield is up 4 basis points to 0.14%, the 10-year has added 14 basis points and stands at 0.66%, and the 30-year at 1.39% is up 20 basis points. Municipal yields have inched up an average of 2 basis points. At this writing, the 2-year AAA municipal general obligation bond yields 0.14%, the 10-year is at 0.67% and the 30-year is at 1.39%. Muni investors are adding $32 billion of cash from maturing and called bonds this month and, with a record low amount of dealer supply, have been adding to muni bond fund holdings; funds have taken in new money for 15 consecutive weeks. So far this month, there has been $19.5 billion of new muni issuance, $8.4 billion of which has come as taxable. Last week, the Arizona Industrial Development Authority was in the market with a $250.7 million issue for Legacy Care structured with a 2050 term maturity that priced at 7.75% to yield 7.836%. The National Finance Authority had a $129.4 million B rated resource recovery refunding deal for Covanta due in 2043 that priced at par to yield 3.625%. Florida’s Capital Trust Agency sold $17.6 million of non-rated bonds for Team Success School of Excellence that featured a 35-year maturity priced with a coupon of 5.00% to yield 4.99%. This week’s calendar is expected to add another $12.5 billion to the total, with $4.2 billion of new taxable supply. Among the high yield financings on the slate is a $131.8 million noon-rated deal for MRC Stevenson Oaks senior living community in Fort Worth, a $59.1 million BB+ rated transaction for Milford Regional Medical Center in Massachusetts, and a $14.2 million non-rated issue for UCP Charter Schools in Orlando.