The 2020 US Presidential Election: Another Close Race?

Uphill Odds for Trump

An analysis of the political fundamentals indicates an uphill road to reelection for Trump.

• His approval rating has averaged 42% during his tenure, while his disapproval rating was 53% as of June 16, resulting in a net approval rating of -11%. Trump is the only President who has not experienced a positive net approval rating by this point during his first term.
• In a NBC/WSJ Poll conducted February 24-27, Trump lagged an unnamed candidate by 7%. He lagged frontrunner Joe Biden by 8% in a Morning Consult/Politico poll (4/19-21), and lagged Bernie Sanders by 3% in an Emerson Poll (4/11-14).
• Market expectations tracked by political betting website, Predictit, gave Democrats a 57% probability of winning the election, while Trump’s reelection probability was 43%, as of April 17. The trend has been stable for the last three months. Similar to the 2016 polls, this political betting website was also off the mark.

Many voters are not impressed with Trump personally. He has significant net unfavorable ratings in leadership attributes, such as temperament, trustworthiness and management skills by margins of -41%, -25% and -18%, respectively, according to a CNN poll (Mar.14-17, 2019). Overall, his unfavorable ratings outnumber his favorable ratings by a 2.1 margin.
He trailed in multiple areas, including education, healthcare, social security and the environment, according to a recent Politico/morning Consult poll (Apr.5 7, 2019). Despite Trump’s landmark achievement, the Tax Cuts and Jobs Act of 2017, he has a net disapproval rating on his handling of taxes from the Pew Poll (Mar.20-25, 2019). Recent polls suggest the Democrats have been successful at labeling the tax cuts as benefitting the wealthy.

However, Trump Has a Path

Despite Trump’s poor standing on key fundamentals, he has a path to reelection. Historically, a negative net approval rating has not necessarily been a deterrent to reelection. President Ronald Reagan was reelected with a net approval rating of -9%, not far from Trump’s current level of -11%. Conversely, a positive net approval rating has not necessarily translated to victory. President George H. Bush had a strongly positive net approval rating of +70%, but lost the election decisively to Bill Clinton. Trump’s trailing position at this early stage does not mean a loss on election day. Clinton won reelection despite trailing an unnamed GOP candidate at this point in the election cycle.

In a Quinnipiac Poll (Mar.21-25, 2019), Trump enjoyed a net favorable rating for personal fundamentals. He scored +46% and +5%, respectively for the statements, “stands up for beliefs” and “tough to handle a crisis”.
In my opinion, these two factors may be important enough to offset some of the other “softer” factors where Trump rates poorly.

Trump’s Advantage: The Economy

In economic fundamentals, Trump has been polling ahead of Democrats in Congress on the most critical issues likely to influence the outcome of the election, including his handling of the economy, jobs and national security.
In these areas, Trump was ahead by +12%, +10% and +5%, respectively, according to a Politico/Morning Consult poll as of Apr.5-7, 2019. Of all the fundamentals that are important factors in the election, economic fundamentals will be the most critical to monitor. If the economy continues to expand and the unemployment rate remains low, then Trump’s reelection prospects improve.

Key Determinants for the 2020 Presidential Elections

• The Economy/Jobs – this is one of the few areas where Trump has polled consistently well so far in his first term. Arguably, it is probably the most important as well. Voters trust Trump over the Democrats in Congress on the handling of the economy by 52% versus 40%, according to the Politico/Morning Consult poll (Apr.5-7, 2019). The economy has averaged a strong 2.8% growth rate so far in Trump’s first term through the first quarter of 2019. This is the strongest growth rate since Clinton’s 3.3% in his first term. If the economy continues to grow above trend and the unemployment rate remains at or near 4%, voters may overlook Trump’s poor approval and favorable ratings and vote to reelect.
• Potential Fallout from Trump Investigations – According to the NBC/WSJ poll from Mar. 23-27, 40% of Americans believe the Mueller Report has not exonerated Trump, while 29% believe it has. Impeachment did not have broad-based support, according to a Washington Post poll taken Mar.26-29, in which 41% supported, and 54% did not. There remains a lot of uncertainty over the ongoing House Democratic investigations and, probably more importantly, local state investigations that may have legal repercussions. It could take a revelation of criminal action or resounding conclusive unethical behavior to affect Trump’s reelection prospects.
• Democratic Opponent – Trump’s Democratic opponent will have a big impact on the prospects of his reelection. An establishment Democratic candidate would have a better chance of defeating Trump then a populist one, based on several polls consistently showing an establishment Democrat like Biden defeating Trump by larger margins compared with populist candidates like Sanders and Warren. There is a divide within the Democratic Party between candidates embracing left wing policies like Medicare-for-all and those calling for more moderate incremental changes to policies like healthcare. Trump has been exposing this divide by raising fears that Democrats are embracing Socialism. According to a Harris/Hill TV poll taken on Jul. 21-22, 2018, 76% of Americans would not vote for a Socialist, while 24% would. It would probably take a US recession or profound social upheaval for Americans to elect a populist Democratic candidate.

Financial Market Implications

Financial markets are already reacting to the start of the 2020 Presidential election campaigns. The market perception of an early edge by the Democrats is leading to the pricing in of some key populist Democratic policies, most notably the Medicare-for-All proposal. This has led to a severe underperformance of the Healthcare sector, which had a year-to-date total return of -0.14% as of April 22, well below the 16.7% gain of the S&P 500 Index. Industrials have outperformed the S&P 500 year-to-date, while the Materials sector has lagged. The potential exists for materials to rally on expectations of an infrastructure program.
The Presidential election is still 21 months away, but the battle has already begun. The Democratic field has 20 candidates and counting, the largest field in recent memory, and the campaigning and fundraising is well underway.

At this time, I believe the GOP’s probability of holding on to the Presidency is 50/50 – better odds than current polls and market expectations. There remains a constant tug and pull dynamic in this race that will ultimately determine the outcome and why Trump’s chances remain even. The positive ratings on the economy remain the consistent pull, while voters disappointed in his personal flaws represent the tug. At this juncture, it is too early to know how close we are to the line. Our base case scenario envisions Trump running against an establishment Democrat. Under this scenario, the economy should continue to grow at or above trend. However, there could be a divergence in financial market performance, with equities and the USD performing better under a reelected Trump, while interest rates underperform.