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  • Writer's pictureJoe Carson

Crisis & 2020 Election: Investors Should Brace For An Earthquake of Change

Crisis often produces a dramatic and unpredictable change in economics, finance, and politics. If history is a guide investors should brace for an earthquake of change.

Political change might be the most consequential for investors. History shows that the crisis tends to unleash people’s resentments, grievances, and anger over inequitable policies and bad management. Transformative shifts in electorate preferences produce major changes in the federal government's economic policies.

Four decades ago, in 1980 the US experienced a watershed election. President Jimmy Carter became the first incumbent president since Herbert Hoover in 1932 to lose an election.

The surprising and substantial victory by Ronald Reagan ushered in a new form of government that focused on lower taxes and fewer regulations.

It also resulted in a major change in Congress. Republicans used the strength of Ronald Reagan’s popular landslide vote to gain 12 seats in the Senate and in the process earn their first Senate majority since 1954.

The 1980 election results reflected two powerful forces.

First, there was a strong vote against poor macroeconomic performance and leadership. In 1980, President Carter faced an economic crisis of ever-rising inflation that threatened economic instability. Based on the recommendation of his economic advisors President Carter decided to impose credit controls as part of an anti-inflation campaign.

The economic fallout was abrupt and sharp: people stopped using credit cards and were “scared away from stores”; retail businesses failed as sales plummeted; the economy posted its sharpest fall in the post-war period, millions lost jobs and jobless-rate spiked sharply higher.

Opposition to the credit controls was swift and broad. Credit controls were viewed as “overkill”, worse than the inflation disease. The damage from the credit controls was so sharp they soon became non-binding and President Carter was forced to unwind the credit restrictions within weeks after they were put in place.

The crises of 2020 and 1980 are 40 years apart but there are policy and economic similarities.

To be sure, in 2020 President Trump has been confronted with the coronavirus crisis that threatened the medical well being of the public and economic stability.

Based on the recommendation of his medical advisors President Trump placed federal restrictions on work-life, travel, and social and recreational gatherings as a way to contain the spread of the deadly virus.

The economic fallout and public outcry have been severe and sharp. Critics argued that the “cure cannot be worse than the problem itself”. The federal policy response has become uneven and at times chaotic as policymakers struggle to balance the medical and economic well-being of the general public.

The 2020 election will enable voters to express their opinion on what matters more.

Second, the 1980 election results reflected a fundamental shift in voter’s view of government. A large majority of voters soundly rejected the government programs of social expenditures and the bloated government.

That shift in voter sentiment ushered in a new way of governing with the focus on lower taxes, reduced spending on social programs, and less regulation. There have been fits and starts to this policy over the decades, but there has been a consistent and constant theme on taxes and regulation.

In 2017, the top marginal individual tax rate was lowered to 37% and 21% for business. By way of comparison, in 1980, the top marginal tax rates stood at 70% for individuals and 46% for business.

The 2020 election will enable voters to express their opinion if this shift has gone too far.

2020 presidential elections are less than 6 months away. Polls are not always an accurate barometer of current or even future voter sentiment, but current polling shows the incumbent party has a deep hole to climb. The economy's performance and the management of the crisis rank very high in the minds of voters.

In 1980 the economy's performance proved to be the most dominant issue on the electorate mind. With the national polls showing a tie one-week before the election Ronald Reagan ended the final debate with a challenging statement, “Are you better off than you were four years ago”?

The 1980 elections results left no doubt on the answer. Ronald Reagan won 489 of 538 electoral votes, winning 47 of 50 states and 50.7% of the popular vote compared to 41% of President Carter. (Note: an independent candidate John Anderson took 6.6% of the popular vote).

Even before the crisis of 2020, a shift in voter preferences was underway. According to the Census Bureau, 53.4% of the voting-eligible population voted in the 2018 mid-term election, the highest voter turn out since it started collecting voter numbers in 1978. That follows the lowest mid-term turnout vote of 41.9% in 2014.

Those record votes reshaped Congress with the Democrats regaining majority control of the House in 2018 for the first time since 2009 and only the third time since 1995.

The 2020 economic and election parallels to that of 1980 are striking. Investors need to brace for a watershed election. A fundamental shift in politics is underway.

The current crisis has dramatically increased the role of the federal government’s management of the economy and involvement in the financial markets. That increased dual role will come with a heavy price (greater supervisory oversight, more regulation, higher taxes on top wage earners and businesses, and possibly a wealth tax at some point).

Is a reversal of fortune in the cards? At the end of 2019, people's holdings of equities stood at 2x times the level of income, twice its long-run average. In 1980, the ratio of equity to income stood .5X times, half its long-run average.

The four-decade rise in the equity/income ratio is over as government policies shift to a less favorable tax regime and more restrictive regulatory and oversight. The question is how fast it reverts to its long-term mean of 1x times, levels that were reached after the 2000 tech bubble and 2008/09 housing crises.

The question for investors is, "Are you prepared for the next four years "?

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