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Post-election priorities matter more to markets than Presidential debates: expert

Yahoo Finance’s Alexis Christoforous and Brian Sozzi preview the Presidential debate tonight with Morgan Stanley Head of U.S. Public Policy Research, Michael Zezas.

Video Transcript

ALEXIS CHRISTOFOROUS: President Trump and Vice President Biden-- former Vice President Biden-- are set to face off tonight in their final debate before the election, and a lot of us are hoping for something a little more substantive than the name calling and angry interruptions we saw the last time. Joining us now is Michael Zezas. He is head of US Public Policy Research at Morgan Stanley. Good morning, Michael.


ALEXIS CHRISTOFOROUS: So we're all looking ahead to this evening's debate, hoping again it can be more constructive. We've got about 42 million people having already cast their ballot. So how much does tonight really matter, do you think, for voters?

MICHAEL ZEZAS: Yeah, it's hard to say. The polls are suggesting that there are very few undecided voters left, and you're right. We already have record breaking amounts of votes having been cast. So my guess is that the debates themselves probably don't tell you a heck of a lot about who's going to win. What they could tell you a decent amount about is the post-election policy priorities.

And ultimately, I think that's what's going to matter to markets between now and Election Day. So if we hear more about specifically the taxing and the spending plans, and whether or not Democrats in particular are going to pursue policies that are net deficit expanding, fiscally expansionary, if they are the ones to take control of the White House and the Senate, I think that's particularly important here because those are frankly the most important questions that investors are asking right now.

BRIAN SOZZI: Michael, you shed good light in some of your latest research on fiscal gridlock after the election. What does that look like, and what's the market risk?

MICHAEL ZEZAS: Yeah, so again, I think basically, you've got two levels of questions that investors are asking here. One, if we don't have a COVID stimulus bill before the election, how does that happen after the election? And then two, what's going to the normal policy path of Republicans or Democrats? And is it fiscally expansionary?

The answer for both of those, in a scenario where the Democrats take control the White House and Senate, is that you're probably getting both levels of stimulus. The concern that we have is that if the Democrats win but they don't get control of the Senate, then you have a real clash of ideologies about what the right thing to do is going forward, not just from a COVID stimulus perspective, but from the perspective of normal policy, tax, spending on infrastructure, spending on health care.

All of that, we think, leads to a scenario where it's much more difficult to get additive fiscal spend. And if you think the economy needs more of that, that we haven't quite achieved escape velocity, in order to keep on a V shaped economic recovery path, that's a scenario that investors, I think, need to concern themselves with.

ALEXIS CHRISTOFOROUS: But Michael, wouldn't you say on some level, Wall Street likes to see gridlock? They like to see status quo. So a divided situation where you have a Democratic White House and the Senate remains Republican might actually be the most beneficial for the stock market, at least?

MICHAEL ZEZAS: I think that's true under normal circumstances. But obviously, we're still dealing with a very difficult economic situation. Our economists have highlighted, for example, that the first relief package, the CARES package, it did put a lot of excess household savings into the system, and that's probably helped as some of these programs rolled off like supplemental unemployment benefits, some of those household stimulus checks.

And so therefore, we haven't necessarily faced a problem with the economic data rolling over yet, but that's something-- some of the excess savings could start to erode into the end of the year and early next year. And so as an investor, you want to have more confidence that the V shaped economic recovery is going to be underwritten. I think that's where stimulus comes in.

BRIAN SOZZI: Michael, you don't sound too convinced that a blue wave is good for the market. I would argue that is contrary to the thesis right now in the markets.

MICHAEL ZEZAS: Well, I wouldn't say that. I'm saying I think there's a difference between the Democrats winning the White House and the Senate, as opposed to them just winning the White House. I think that binary of who controls the Senate is particularly important, because if the Democrats control the Senate and the White House, you're very likely to get that fiscal expansion that underwrites the V shaped economic recovery.

But if you don't take control of the Senate, you're going to have an ideological debate playing out that probably makes it much more difficult to deliver that, and so therefore, there probably will be, at least in the minds of investors, some more questions about the sustainability of the recovery between now and the period when the economy can normalize because we've made it through the pandemic, which obviously is not right around the corner.

ALEXIS CHRISTOFOROUS: What about how the market is viewing stimulus? We saw it rally the past few days on the hopes that we can get a deal before the election. It's seeming more and more likely that that's not going to happen. So what does happen when we finally do get another stimulus deal? Is that going to be a huge catalyst for this market to the upside? Or will that have already been priced in?

MICHAEL ZEZAS: Yeah, I think the-- obviously, the markets have been moving a lot in terms of the short term, whether or not we'll actually get something before the election. I think what's more important here is are you going to get this, as I said, before you have economic data showing potentially some rollover, some weakness, which we think is probably a later in the year, early next year event.

And so I don't know that if you get stimulus, you're necessarily going to see a huge market move per se, because we also haven't seen a huge reflection of the risk that comes with not having stimulus. I actually think the bond market is probably the best place to look for what's being priced in here. The move since the end of August-- the 10 year up 30 bits, the 30 year up 40 bits-- I think it's telling you that regardless of whether or not you get something pre-election, most pads over the medium term, i.e. over the next few months, do lead to stimulus. And so you should be pricing in with a higher and steeper yield curve, the possibility we're going to see higher deficits and over time, higher inflation and higher growth.