Summary

The past week has brought a mix of positive and negative macro developments.

On the negative side:

• Near-term vaccine prospects have dimmed again as another vaccine trial was temporarily halted while adverse effects are being investigated.
• The number of daily COVID-19 infections around the world continues to set new records.
• Europe’s COVID-19 numbers continue to deteriorate.
• The European economy may be starting to wobble.
• More U.S. fiscal stimulus seems unlikely in the very near term.

Conversely, positives include:

• Financial markets are warming to the likely prospect of a Biden presidency.
• Spain’s COVID-19 infection rate may finally be starting to fall – an important bellwether for a broader European turn.
• The emerging market COVID-19 infection numbers remain fairly steady.
• The U.S. COVID-19 numbers are not deteriorating as quickly as in most other developed countries (though this is thin gruel – they are still getting slightly worse over time).
• The U.S. economy appears to have continued to grow through September.
• The consensus 2020 growth outlook and the International Monetary Fund’s (IMF’s) 2020 growth forecast have both been revised higher.

Virus developments

The global COVID-19 numbers continue to set new records, though, fortunately, the fatality numbers remain roughly steady (see next chart).

Global COVID-19 cases and deaths

Note: As of 10/19/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

Although emerging market (EM) nations continue to record the bulk of the new infections, developed countries are deteriorating quickly and conceivably on track to surpass their EM brethren over the coming several weeks (see next chart).

COVID-19 emerging market versus developed market infections

Note: As of 10/19/2020. Calculated as the 7-day moving average of daily infections. Source: ECDC, Macrobond, RBC GAM

European hot spot

Europe continues to struggle mightily against its second virus wave. On a population-adjusted basis, France, the U.K. and Spain are now suffering (or at least identifying) more new daily infections on a per capita basis than the U.S. ever did (see next chart). This is concerning.

COVID-19 cases on a population-adjusted basis

Note: As of 10/19/2020. 7-day moving average of daily new cases per one million residents. Source: ECDC, Macrobond, RBC GAM

France is particularly troubled, with nearly 25,000 new infections each day and rising (see next chart). While the fatality numbers are nowhere near their prior records, they have also increased significantly. Italy is now rising quickly with nearly 9,000 new cases per day. Poland has risen from nearly nothing to 7,000 per day.

COVID-19 cases and deaths in France

Note: As of 10/19/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

The U.K. is also quite challenged, with around 17,000 new infections per day. But the rate of growth appears, at least, to be decelerating (see next chart).

COVID-19 cases and deaths in the U.K.

Note: As of 10/19/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

Meanwhile, Spain – which was until recently suffering the worst of Europe’s second wave – has not only halted its deterioration but begun to improve (see next chart). In fairness, it is not so much that Spain has improved significantly as that other European countries have continued to deteriorate so badly over the past few weeks.

COVID-19 cases and deaths in Spain

Note: As of 10/18/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

Nevertheless, Spain offers some hope that Europe will finally figure out what amount of social distancing is necessary to tame the virus, even though it has taken several months longer than we had initially imagined.

Canadian challenges

Canada continues to deteriorate, if at a less calamitous rate than most of Europe (see next chart). Quebec, Ontario, Alberta and British Columbia remain on a problematic trajectory. The most affected provinces are increasingly limiting high-risk activities as per the risk hierarchy set out in the subsequent table. In turn, we give Canada good odds of slowing or even reversing the tide over the next several weeks.

COVID-19 cases and deaths in Canada

Note: As of 10/19/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

Activities by risk (and what might need to be halted to control virus)

Note: As of 10/20/2020. Bolded activities are ones with direct economic consequence. Source: RBC GAM, Government of Canada

U.S. deteriorates less than rest

The U.S., meanwhile, looks fairly good compared to the rest (see next chart). Of course, this is all relative: the U.S. is still recording more than 50,000 new infections per day and is suffering a slight upward trend. But the rate of deterioration is nothing like the other countries. The U.S. numbers remain lower than their July peak and the country’s fatality numbers have continued to decline (so far).

Whereas the U.S. coasts took the brunt of the first wave and The South was disproportionately affected by the second wave, this third wave has had an outsized impact on the U.S. Midwest. It appears that every region has to learn its lessons the hard way.

COVID-19 cases and deaths in the U.S.

Note: As of 10/19/2020. 7-day moving average of daily new cases and new deaths. Source: ECDC, Macrobond, RBC GAM

Even though the rate of deterioration is gradual, let the record show that the majority of states representing nearly 90% of U.S. GDP are recording problematic transmission rates of greater than one (see next chart). Furthermore, a number of states are actively lightening their social distancing rules, pointing to the prospect of a further U.S. virus acceleration in the coming weeks.

Share of U.S. GDP generated by states with COVID-19 transmission rate above or below key threshold of one

Note: As of 10/18/2020. Transmission rate calculated as 7-day change of underlying 5-day moving average of new daily cases, smoothed with 7-day moving average. Transmission rate above one suggests increasing new daily cases. Includes Washington, D.C.  Source: The COVID Tracking Project, U.S. BEA, Macrobond, RBC GAM

France versus Germany

It is instructive to compare the relative plights of France and Germany in an effort to identify best practices. While the timing of this analysis is suspect given that Germany is itself now also deteriorating, the country has nevertheless fared much better than France during the second wave (see next chart). It is presently recording roughly five times fewer new infections each day. While not immediately visible in the chart, Germany also arguably outperformed France during the first wave if one were to adjust for the country’s relatively greater population.

Spread of COVID-19 in France vs. Germany

Note: As of 10/19/2020. 7-day moving average of daily new cases. Source: ECDC, Macrobond, RBC GAM

Germany’s outperformance is arguably a function of seven things:

1. Testing: During the first wave, Germany was much faster to implement an effective program for testing, tracing and quarantining cases. One reason for this is that Germany immediately leveraged private sector and local laboratories to expand testing, rather than relying solely upon government labs.
2. Protecting the vulnerable: Germany did more to protect its most vulnerable citizens. For example, the country created a response team to handle the specific needs of the elderly.
3. Science first: Germany arguably did a better job of allowing scientists rather than politicians to take the lead in setting policy and in communicating with the public.
4. Compliance: Germans have significantly greater trust in their government than do the French, with the implications that compliance of social distancing rules was likely greater in Germany than in France. Incidentally, Canada performs even better than Germany in trust in government, while the U.S. does worse than France.
5. Medical capacity: Germany had sufficient medical capacity to handle the outbreak, with eight beds per thousand people versus six in France. That said, both countries look fairly good relative to their peers. Canada lags badly with juts 2.5 beds per thousand.
6. Social distancing: German social distancing rules were not quite as strict as those of France last spring. However, in retrospect many of the restrictions imposed last spring were overdone. Of greater salience, Germany did not loosen its restrictions as much as France last summer. In turn, it avoided seeding as severe a second wave (see next chart). The two are now on a fairly similar stringency footing, though we find it bizarre that University of Oxford believes Germany eased its rules recently given that there are numerous anecdotes of tightening in the news.

Stringency of lockdown by country

Note: As of 10/13/2020. Stringency index over time and the extent to which countries have shut down in relation to the U.S.  Source: Google, University of Oxford, Apple, ECDC, UN, Macrobond, RBC GAM

7. Finally, Germany had a bit of luck in that its initial encounter with COVID-19 came disproportionately via young people returning from skiing holidays. This young cohort proved relatively more resilient and gave time for the country to hone its response.

While compliance and medical capacity cannot easily be altered overnight, there is significant room for other countries to learn from Germany’s relative successes in ramping up testing and tracing, protecting the vulnerable, allowing science to lead, and implementing appropriate social distancing rules. Alas, Germany may need to relearn some of its own lessons to the extent its numbers have also begun to deteriorate.

In pursuit of herd immunity

The so-called Great Barrington Declaration has lately received considerable attention. It is a proposal by a group of scientists to pursue a radically different strategy in seeking to defeat COVID-19. On the surface, it sounds not only coherent, but quite attractive. The central claims are as follows:

• The fastest way to achieve herd immunity and thus to effectively eradicate the virus is to allow the virus to spread freely among the healthy population.
• Most people have a low risk of fatality from COVID-19. As such, they can be infected without much risk. To the extent that only 60% of the population needs to be immune to the virus to stop it from easily spreading further, the healthy and young subset of the population should be more than large enough to end the threat of COVID-19.
• The old and vulnerable would isolate during the period of transmission to avoid getting infected, and then benefit from the return to normality thereafter.
• This proposal would allow the economy to return mostly to normal overnight, and then completely to normal after herd immunity is achieved – likely within a matter of several months.
• By resolving the virus more quickly, this would fix all sorts of secondary problems associated with the pandemic such as elevated poverty, lower quality virtual schooling, loneliness and fear.

Sweden has flirted with this strategy, and the U.S. White House recently endorsed the idea.

However, The Great Barrington Declaration probably isn’t practical, for several reasons.

1. Properly identifying and separating the healthy from the at-risk is surprisingly hard.

• It isn’t possible to perfectly identify who is vulnerable: some otherwise healthy people have died from COVID-19, and many people are not aware they possess underlying vulnerabilities.
• Not every old or vulnerable person will be willing to self-isolate. And while such conduct is arguably foolish, the punishment for foolishness should not be death.
• Not every old or vulnerable person will be able to self-isolate. Many reside in multigenerational families, many work jobs that are key to the financial well-being of their families, and most will have to venture regularly into the community to procure necessities.
• Many old and vulnerable people have caregivers who would compromise the self-isolation strategy. While the Great Barrington Declaration proposes that only those with immunity to COVID-19 be given these jobs, such workers will already be in high demand and probably command significantly higher wages than the present pay-scale for personal care workers. Further, what becomes of the existing personal care workers?
• Meanwhile, from the flip perspective, not every young or healthy person will be willing to venture out in the middle of a pandemic and socialize even if they are allowed to. This would delay or even preclude the attainment of herd immunity. Case in point, Swedish authorities had publicly predicted that around 40% of their population would be immune to COVID-19 by May 2020, whereas the actual number was only around 15%.

2. The surge in infections that would be necessary to take the fraction of the population with immunity from around 6% to 12% presently (using the U.S. as an example) to 60% would likely result in a surge in hospital demand that could overwhelm hospitals even though the infections were disproportionately impacting the young and healthy.

3. Contracting COVID-19 is undesirable even for the young and healthy. It isn’t pleasant to be sick, let alone with an illness that frequently feels flu-like or worse. Furthermore, some appear to become afflicted with chronic problems thereafter. But, most damningly, there is no guarantee the immunity lasts. The healthy population might need to get infected every year in perpetuity, with the old and infirm required to isolate for a lengthy period of time each year.

4. The World Health Organization says that pursuing herd immunity via infection is both unethical and unscientific, in part because it involves actively allowing people to get sick rather than seeking to protect them.

As such, it probably doesn’t make sense to pursue the Great Barrington Declaration, particularly with vaccines seemingly on their way over the next year.

What about the opposite tactic?

As a thought exercise, it is also worth considering the idea of pursuing the opposite of herd immunity: attempting to eradicate the virus as per China. This is also quite attractive on the surface: having nearly completely wiped out the virus in mere months, China has since enjoyed the best economic performance of any major nation.

However, this probably isn’t practical, either.

To successfully eradicate the virus requires an extremity of social distancing that citizens of the developed world, at least, are unlikely to tolerate. Many Chinese people were effectively locked inside their apartment compounds for months at a time.

Furthermore, China has unleashed truly extraordinary efforts when mini-outbreaks have occurred. After minimal cases for months, an outbreak of 9 infections linked to a hospital have resulted in the government planning to test all 9 million residents of the affected city. Policy efforts on this scale are challenging to replicate in countries where the state is not so all-powerful.

New Zealand represents something of an exception in that it has effectively eradicated the virus on its own shores, but it was blessed with formidable natural barriers and an initially light outbreak that rendered the control effort more manageable from the beginning.

School success

Studies have clearly established that children are capable of contracting COVID-19 and of infecting others. Yet it appears that younger children are less adept at this and more broadly that schools have not been major sources of transmission. One recent major study found that the adults in schools were bigger transmitters than the children.

For the most part, in-person schooling has been a success. In Canada, most reported school-based cases involve a single case or a small handful of cases, with transmission usually occurring outside of school. The National COVID-19 School Response Dashboard tracked around 230,000 kids across 47 states. It identified that 0.14% had contracted COVID-19 over the prior two weeks. For context, this is slightly lower than the 0.21% of the overall U.S. population that had contracted COVID-19 over the same period of time. This doesn’t mean that schools are risk free, but rather that children aren’t being infected greatly more than they would have been outside of a school setting.

Of course, safety in a school setting is not automatic. It is in significant part a function of the intensity of the virus in the community and the deployment of safety protocols. These include wearing masks and ensuring sufficient distancing.

U.S. universities initially had a massive problem with COVID-19. At one point they were responsible for as much as 15% of transmission within the country. Fortunately, the trend has since improved. According to an analysis by Fundstrat Global Advisors, the 15 most adversely affected universities have seen their caseload drop by 88% relative to their early September peak. The system-wide decline is 35%. Furthermore, and reflecting the relative youth and health of university populations, the fatality rate has been just 0.04% so far – perhaps a tenth of the society-wide fatality rate.

The recovery risk

From a medium-term standpoint, we expect the economic recovery to continue into 2021 and beyond. However, as the second wave of COVID-19 becomes more intense, it is worth revisiting whether economic activity might temporarily shrink in the extreme near term: over the next month or two.

In the past, we have argued that growth should continue even as subsequent virus waves play out, albeit at a slower rate of expansion. Supporting this thesis, the U.S. economy never shrank during its own summer second wave. The trio of fading fiscal support, lagged credit problems and prospective housing weakness are also proving less fearsome than anticipated.

This is still a perfectly reasonable conclusion. One can find no small amount of September economic data that argues the expansion continues in much of the developed world despite the intensifying virus count and incrementally more economic restrictions.

However, we want to flag that there is a real risk that economic activity may actually edge slightly lower in October and perhaps November in some countries. The main theoretical argument for this is that governments are now beginning to shut down economic sectors such as tourism and food services that had previously been opened. While these sectors are not a huge part of GDP, they are large enough to offset a normal month’s growth.

Furthermore, although the U.S. never shrank in July and August, despite its own tightening of social distancing rules, the situation was arguably different then. Economies were expanding by leaps and bounds over the summer as they benefited from the lagged effect of earlier efforts to lighten social distancing rules. Case in point, the U.S. managed to grow by around 1.5% in July despite actively tightening. But the second wave was not cost free: Canada, by way of comparison, grew by 3.0% over the same month. If one interprets this to mean that the second wave will slow growth by half, it suggests further sluggish growth is possible in October and November. However, if one instead interprets it as subtracting 1.5 percentage points from growth, that could very well translate into an economic decline in the fall to the extent these months were unlikely to grow by much more than 0.5% per month otherwise.

While most European economic indicators continue to register growth, it should be noted that the Eurozone Services Purchasing Manager Index fell below the critical threshold of 50 in September. This indicates that service sectors are indeed being adversely affected by recent policy changes. Spain, which up until recently was the most adversely affected of the European nations, suffered a notable decline in retail sales in September.

Recent analysis from Goldman Sachs argues that the additional social distancing rules implemented globally over the past month should subtract a few additional tenths of a percentage point from growth. It is debatable whether this will be enough to undermine growth altogether since developed-world growth through the late summer was in the realm of 1% per month, but would be just 0.15% or 0.2% under more normal circumstances.

We conclude that there is a distinct risk of a month or two of economic decline this fall as tighter rules are implemented. Europe is the most vulnerable party to the extent it has the lowest natural speed limit, the worst second wave experience, a history of poor performance coming out of recessions, and wobbly economic data already. But others are not completely immune. Still, the most likely scenario remains sluggish growth over the next few months for most parties.

The A, B, Cs of the recovery

Efforts to describe the shape of recessions and recoveries frequently resort to characterizing the trends in the context of the alphabet. To illustrate, the pandemic initially had the properties of a classic “V”-shaped recovery to the extent that the initial economic rebound proved quite brisk. Since then, the recovery has slowed to the extent that it now looks more like a “U” (classically used to denote a smoother, more gradual rebound).

In fairness, an even more apt description would be something like the Nike swoosh logo, with a rapid but smooth decline followed by a lengthier recovery period. For those with a higher level of mathematical knowledge, one might argue the recovery resembles an asymptotic function, initially leaping higher but then recovering the remaining ground at an ever decelerating rate. In fairness, practically every recession looks like those shapes.

Of course, as per the discussion in the prior section, we cannot rule out a “W” in that there could well be two distinct periods of economic decline, albeit the first one many times deeper than the second.

Recently, others have begun to describe the recovery as “K”-shaped in that some sectors have remained weak while others have strengthened nicely – as per the lines angling down and upward in the letter. This is a fair critique of the present recovery, and while there are always winners and losers in recessions, it does feel as though the divide is bigger than usual this time.

Perhaps the main conclusion is that the Roman alphabet lacks a sufficient variety of shapes to convey the true nuance of economic activity. Alternately, this has been a V.U.S.A.W.K. recovery. It doesn’t exactly roll off the tongue.

Economic developments

Mobility data

Google mobility data is once again being published. At this point, it seems more trustworthy than the Apple mobility data. The Google data indicates that the retail & recreation sectors are seeing a flat to slightly declining level of activity at present, whereas workplace activity is largely holding up. Overall, the mobility data paints a picture of limited economic growth, at best.

OpenTable restaurant reservations are now falling in some countries as the restaurant and bar sectors have been targeted for closure in many countries.

Traditional indicators

We have now constructed our own monthly GDP proxy for the U.S (see next chart). It is the synthesis of four traditional monthly indicators that are released on a timely basis. As such, it puts the emphasis on being timely more than on being thorough. You can see the sharp economic decline, followed by a substantial but incomplete recovery.

U.S. GDP estimates

Note: GDP proxy, as of Sep 2020, derived using four monthly economic measures. Official GDP as of Q2 2020. Source: Haver Analytics, Macrobond, RBC GAM

In actual fact, and with relevance to the emphasis on being timely over being precise, we believe the true monthly trough in economic activity was more like -15% as opposed to the -10% depicted by this measure. Similarly, the measure optimistically claims that as much as 80% of the economic decline has since been recovered. Our suspicion – based on a broader set of readings – is that the true recovery is more like two-thirds of the earlier economic decline.

U.S. traditional economic data has been mixed recently:

• Retail sales rose by a happy 1.9% in September.
• Payrolls for September were also strong (as discussed last week).
• Industrial production fell by 0.6% over the month.
• The latest iteration of weekly initial jobless claims suffered a 53K increase to 898K new claimants. This aligns with some notable layoffs reported in recent weeks.

Chinese GDP

Chinese third-quarter GDP has just been released. While it slightly missed expectations, it nevertheless continues the country’s incredible post-COVID-19 economic recovery. Chinese GDP is now 4.9% higher than it was a year ago, an improvement on the +3.2% number reported in the second quarter. This remains shy of the 5.75% annual growth we would have expected absent COVID-19. However, it is nevertheless incredible how far the Chinese economy has come. While the situation is somewhat different than in the rest of the world, China’s experience continues to argue for a zippier-than-expected recovery globally. And, consistent with this, the global economic rebound has been faster than generally expected so far.

Canadian data

Canada’s September job numbers were quite good, easily exceeding expectations with a 378K gain. This was nearly double the prior month’s respectable +206K haul. Accordingly, the unemployment rate fell from 10.2% to 9.0%, returning to single digits. While there is still plenty of work left to be done before the labour market normalizes, around three-quarters of the jobs lost to the pandemic have since been recovered. This is well ahead of the U.S. pace.

The latest quarterly Business Outlook Survey for Canada finds businesses in an improved mood relative to the prior survey. Capital expenditure intentions have returned to a flat reading after having plummeted in the prior quarter. Hiring plans remain firmly in positive territory, albeit at a lower level than pre-pandemic. Curiously, they never went negative – perhaps because no survey occurred during the month of March. While companies report difficulty meeting demand and difficulty securing workers (both potentially inflationary forces), they also anticipate slower wage growth and lower output prices.

Meanwhile, existing home sales in Canada continue to soar, up 20% relative to pre-pandemic levels. And the market appears set to grow only tighter in the near term, given that new listings fell by 10% in September.

Shifting consensus forecasts

Economic forecasts continue to be upgraded more than they are downgraded. Several weeks after we penciled in our own upgraded 2020 forecasts for the U.S. (-3.5%) and Canada (-5.0%), the official consensus numbers have similarly risen. The consensus for U.S. GDP has now risen over the past month to -4.0% and for Canada to -5.8%.

The IMF’s quarterly forecast update has also been released, and similarly includes prominent upgrades. The IMF added a massive 3.7 percentage points to its 2020 U.S. GDP forecast, alighting at -4.3%. While it added 1.3 percentage points to Canada’s number, the result is still just -7.1%. This is considerably more cautious than either the consensus or than our own working number. The IMF remains cautious on the U.K. and the Eurozone as well. It also chopped a big 5.8 percentage points off its 2020 Indian growth forecast, resulting in a -10.3% figure.

Two further comments may be useful.

1. The U.S. is outperforming the rest of the developed world yet again. The country simply has a more dynamic economy. This is presumably due to some combination of its greater economies of scale due to its large population, its ability to attract star researchers due to its famous universities, a more flexible labor market, lighter regulations, a more risk-taking culture, and so on. Even when the crisis originates in the U.S., as per the global financial crisis, the U.S. recovery is often faster than the rest. With COVID-19, the U.S. has arguably handled the virus itself worse than most, and yet again finds itself in an enviable economic position. It is truly a remarkable thing.

2. While the 2020 GDP numbers have been steadily improving for many months, they are still awful in an absolute sense – the worst in nearly a century. Furthermore, as the 2020 growth numbers have been upgraded, at least part of the improvement has been subtracted from 2021 forecasts. There’s just less recovery remaining for 2021, and furthermore vaccine expectations have weakened somewhat.

U.S. election in two weeks

The U.S. election is now just two weeks away. Let us run through the key thoughts, polls and implications.

A few scattered thoughts

In addition to the many observations made in past MacroMemos – that uncertainty is unusually high given the pandemic, mail-in ballots, racial injustice protests, and so on – there are a few new items to share. To the extent the polling and betting markets overwhelmingly favour the Democrats and Joe Biden, we focus on observations that could challenge that consensus expectation:

• President Trump is back on the campaign trail. Much as he suffered a popularity loss when he temporarily paused his campaign while recovering from COVID-19, he could well enjoy a boost, particularly as he downplays the severity of the virus and the effectiveness of the treatments he received.
• While the Democrats have led in early voting and in overall voter registrations, Republican voter registrations have been surging in the three key states of Florida, North Carolina and Pennsylvania.
• The presence of Kayne West on the ballot in 12 states could yet siphon a consequential number of votes away from the Democratic Party. That said, of the 12, only Iowa is truly in play.
• Voter intentions barely budged after the Vice Presidential debate, in contrast to the Presidential debate when Biden’s popularity surged.

Likely outcome

Polls continue to give Democratic Party candidate Biden a big 10 percentage point lead. For context, the largest surprise in the last five elections was a mere 3.1 point miss, and the largest surprise going back to 1948 was 9.4 points. In other words, barring a collapse in polling over the next two weeks, there is no modern precedent for an election diverging sufficiently far from the polls to result in a Trump win.

The betting market PredictIt has held steady over the past week, maintaining a 64% chance for a Biden win (see next chart). RealClearPolitics assigns an identical probability.

Biden leads Trump, gap widened after first debate

Note: As of 10/15/2020. Based on prediction markets data and RBC GAM calculations. Source: PredictIt, RBC GAM

The models constructed by fivethirtyeight.com and The Economist both continue to make considerably bolder claims, and argue that the likelihood of a Biden victory has continued to rise, now at a big 87% chance according to the former and a 91% chance according to the latter.

We land somewhere in the middle. We suspect betting markets are generating overly cautious forecasts due to the 2016 surprise. But we are nevertheless dubious that the likelihood is genuinely as high as 91%. We assign a 75% likelihood of a Biden victory.

From a Congressional perspective, a Democrat sweep continues to be the most likely outcome, though the Senate race is closer than the rest with “just” a 63% chance of turning toward the Democrats (see next chart). The race should at least be close in purely numerical terms: the most likely outcome is that the Democrats wind up with 51 Senators versus 49 for the Republicans. Despite this, fivethirtyeight.com estimates a 72% chance that the chamber will be controlled by the Democrats.

A probable Democratic sweep

Note: As of 10/15/2020. Source: PredictIt, RBC GAM

As a sort of cross-check, we note that 8 of the 9 pivotal states are currently leaning toward Biden, though two are very close (see next chart). It should be observed that Biden doesn’t need as many of these states as Trump to win. In fact, if Trump loses Florida it will be a challenging path to a second term for him.

U.S. presidential election Trump v. Biden

Note: As of 10/16/2020. Source: Real Clear Politics, Macrobond, RBC GAM

Biden and the stock market

In the past, we have argued that a Biden win might be positive from an economic standpoint, but conceivably negative from a stock market perspective. But this second element is now in doubt. The stock market may have changed its mind about Biden.

Via a simple econometric model, we estimate that every time Biden’s polling rose by a percentage point between June and the end of August, the stock market fell by around 1%. However, since then, the opposite has happened. Every percentage point gain in Biden’s popularity has seemingly added 2.3% to U.S. equities. It should be noted that neither of these effects can explain more than 10% of what is going on in the stock market, but both are nevertheless statistically significant to a 95% confidence level.

Interpreted through an economic lens, it appears the allure of fewer tariffs, more immigration, a more science-led COVID response, less policy uncertainty and of course more fiscal stimulus is now considered sufficiently positive by the stock market to offset the prospect of higher taxes. For that matter, surprisingly, tax increases have not historically been a particularly large impediment to the stock market.

Or maybe the thinking is that politicians are usually reluctant to raises taxes while a recovery is ongoing. That means the tax hike part of the Biden agenda might not happen for a few years, perhaps even until after the 2022 midterms, at which point conceivably Republicans will be in a position to reclaim part of Congress and limit such efforts.

A different way of thinking about the stock market’s new enthusiasm for Biden is that markets don’t like uncertainty. They can live with either candidate but don’t want a messy contested election. As such, the rising prospect of a resounding Biden win is good, albeit no better than a clear Trump win.

A similar argument is that the stock market would be happy with a Democrat sweep or a Republican sweep because either one would ensure significant fiscal stimulus. It is a divided Congress that could prove problematic, and the odds of that have diminished in recent months.

Let us not forget that the stock market’s view about Trump changed diametrically the day after the election, so there could yet be further reversals. Our table of Biden implications now lists a “debatable” implication for the candidate’s effect on the stock market, but retains its other prior conclusions (see next table).

Biden platform relative to Trump and implications

Note: As of 10/15/2020. Source: RBC GAM

U.S. fiscal prospects

We remain dubious that the U.S. will manage to introduce a new fiscal stimulus package before the election.

Despite repeated talk of a $1.5T to $2T package, including proposals for a lump sum cheque, more UI support, aid for airlines and further paycheque support for businesses, the incentives just aren’t there.

The economy isn’t struggling enough to motivate a major bipartisan effort, and it makes little sense for the Democrats to sign on to a major stimulus deal – and a win for President Trump – a mere two weeks before a critical election. They would do better to wait until after the election and cobble together a deal with the Republicans then, or even more probable, wait until the New Year when they may control a larger share of the political apparatus.

-With contributions from Vivien Lee and Kiki Oyerinde