This is probably going to be our last pre-election blog article. And of course, we have saved the most exciting bit for the very end. We are referring to this year’s 5,876 regularly scheduled state legislative races (as well as dozens of special elections). Curb your enthusiasm, we won’t go through each one of them, and not just due to space constraints.¹ Instead, we want to give you three reasons why the results will deserve your attention.

First, as U.S. Supreme Court Justice Louis Brandeis famously pointed out: “It is one of the happy incidents of the federal system that a single courageous State may, if its citizens choose, serve as a laboratory; and try novel social and economic experiments without risk to the rest of the country.”²

During the Covid-19 pandemic, different states and sometimes even different counties took different approaches, in effect conducting natural experiments. These are already producing a wealth of new data, for example on whether strictly enforced mask mandates in some Kansas counties reduced infection rates compared to otherwise similar counties within the state.³ Such experiments were, of course, not without risk, but at least, they might allow policymakers not just in the U.S. to learn from them in both public-health and political terms.

Politically speaking, do mask mandates and strict lockdowns work? Or is it better, in purely electoral terms, to quickly open up again for business? Early polling indications are that aggressive virus containment boosted the approval of both Democratic and a few Republican governors taking such approaches.⁴ Meanwhile, President Trump appears to be losing support especially in areas with high rates of Covid, already leading pollsters to speculate that “political scientists will be studying COVID effects on county- and state-level votes for many years to come.”⁵ Once next week’s results are in, though, we will know a lot more. For policymakers abroad this may be particularly interesting as they ponder their own lockdown strategies. And for that, granular state legislative races will probably offer the best pointers.

Second, results will be critical for the 2020 redistricting cycle, due to kick off after this year’s decennial census. Back in 2010, Democrats were caught off guard, but this time around, they have invested heavily, including in states such as Texas.⁶ That may help explain stunning turn-out trends – already, over 8.5 million early votes have been cast in that state, almost as many as all the votes cast in 2016. Control of the Texas House of Representatives may now hang in the balance.⁷

Finally, state-level developments also offer indications on how either one of the two major parties might react to defeat at the national level. Scholars are fond of pointing out that “American parties are notoriously diffuse and infamously hard to define."⁸ The politics of Kansas both before and after Kris Kobach lost the gubernatorial election to Democrat Laura Kelly in 2018 could still provide an indication of how Republicans might react to a Trump defeat.⁹

“Governing a nation so evenly divided in its partisan preferences will be an enormous challenge,” the dean of the Washington press corps noted.¹ He was not commenting on the disputes of the Trump era, but instead reacting to the apparent divide into “red states” and “blue states” in 2000. Ever since, the prospect of another disputed election being decided by the U.S. Supreme Court has haunted observers. Such a Florida-style recount would require the race being tight in the Electoral College, with a small number of votes in one or only a few swing states making all the difference. This seems unlikely.

As we previously argued, the looming spike in voter turn-out boosts uncertainty.² It is a fairly safe bet that the demographic composition of the 2020 electorate will catch some partisan strategists by surprise, just as it did in 2016. Ever since the 1990s, both major parties have gotten increasingly sophisticated in targeting, registering and mobilizing voters in exactly those states likely to make a difference.³ That has been facilitated by the rise of partisan media outlets, as well as multi-year efforts to gather material seeking to discredit the other side’s likely front-runner.⁴ In other words, the reasons why presidential elections have gotten so tight may have less to do with the electorate itself than with how both parties have run their campaigns in recent decades. There is certainly plenty of evidence of growing polarization in Congress.⁵ As for the broader electorate, though, the share of voters identifying with either major party has actually been declining since the 1980s, with over 40% describing themselves as “Independent” for much of the Trump years.⁶

Moreover, both Democrats and Republicans are not all that cohesive as political tribes. In his 2004 book, “What’s the matter with Kansas,” Thomas Frank describes how the politics of his home state was shaped by “a civil war pitting moderates against conservatives for over a decade now” (p. 89). Frank also offers a prescient preview of many of the patterns we saw during the Trump years, including the realignment of some wealthier, fiscally conservative but socially moderate voters with Democrats during the 2018 midterms.⁷ You could go back to 1980 and the independent candidacy of former Republican Congressman John Anderson for early signs of this split. It is precisely because of such points that mobilizing and targeting each side’s partisans has gotten harder.

All of which would be consistent with a Biden landslide. But if a combination of late deciders or polling errors were to swing things for Trump in the Electoral College again, such patterns seem unlikely to be limited to just a small number of votes in one or two swing states. Instead, it would probably indicate that the previously disengaged part of the electorate proved more receptive to Trump’s message in 2020 than the pollsters thought. We believe that would probably cause a string of upsets, rather than just a narrow Electoral College win.

With November 3, 2020 quickly approaching, we detail possible election outcomes and their potential positive/negative impacts on the municipal bond market.

Biden wins (Democratic Sweep of Presidency, Senate and House):

_ We expect less political gridlock and a more favorable landscape for policymaking.

_ Additional round or rounds of stimulus for the economy to cope with the COVID-19 pandemic and the ongoing recession would be likely in our view. Additional stimulus would provide much needed support to state and local governments for lost revenues due to COVID-19 and mitigate difficult decisions to close budget gaps.

_ A restoration of State and Local Tax (SALT) deductions – as suggested in the election campaign – would provide more flexibility for local governments in high tax states to increase revenue through tax increases, if necessary.

_ In our view, Democrats would maintain the Affordable Care Act (ACA) or prioritize a replacement in the event that it is repealed by the U.S. Supreme Court, which we expect would be a positive for states that expanded Medicaid to its citizens, as well as for not-for-profit hospitals.

_ Likely to pass a green infrastructure plan. This would reduce the infrastructure project backlog and should thereby lessen the stress on states to fund much needed repairs.

_ We expect more singular policy related to COVID-19 and potential for restrictive economic measures to control the virus that could again limit state and local revenues.

Biden wins (Republicans maintain control of the Senate):

_ This outcome might lead to political gridlock and less favorable policymaking environment.

_ We expect brinkmanship on debt ceiling and possible federal government shut down hurting state and local governments.

_ In this scenario, we see little chance of additional stimulus, potentially prolonging the recession.

Trump wins (with a Divided House and Senate):

_ For this outcome we see a low likelihood that a stimulus bill in support of state and local municipalities is passed.

_ A possible repeal of the ACA with no replacement could put additional pressure on states that expanded Medicaid to its citizens, as well as for not-for-profit hospitals.

_ We would expect the passing of an infrastructure plan (it is unlikely to be green). This would reduce the infrastructure project backlog and lessen the stress on states to fund much needed repairs in our view.

_ Unlikely to have restrictive economic measures to contain the virus.

Investment outlook

Regardless of the upcoming presidential election outcome, we remain bullish on municipal bonds. Under a Biden win scenario or Democratic Sweep, municipal bonds are likely to remain in high demand as federal income tax rates are expected to go higher, making the muni tax-exemption more valuable. In addition, further stimulus for state and local government entities is more likely.

Under a Trump win or Divided Government outcome, the status quo continues and further stimulus (albeit on a smaller scale) is to be expected. The lower likelihood of new restrictions to contain the virus could mean less downside potential for state and local revenues.

The key swing state polls suggest a decisive Biden victory

Of the 12 swing states, which hold 189 electoral votes, Biden is leading in the polls in 10 of the 12 states and by a large gap in most of them (135 electoral votes). Trump is leading in only two of these states (54 electoral votes). These swing state polls suggest a decisive Biden victory. We see the polls as an important indicator of likely results, but it is still far from certain.

A Biden victory suggests larger, but later stimulus than otherwise likely

We are disappointed that further stimulus (support) was not added this autumn and now appears unlikely until after the election. We believe the United States still needs large, but also timely and well targeted stimulus to recover its peak gross domestic product (GDP) by 2021 end. We still expect more stimulus regardless of the election's outcome eventually. We hoped to avoid complete or prolonged interruptions of certain programs, such as the Paycheck Protection Program or sharp drops in enhanced unemployment, that could cause more permanent business closures and make household job transitions more difficult and trigger credit losses, stopped rent payments, etc. Election season fighting has delayed stimulus to after the elections and if Democrats sweep, it is quite possible that more stimulus does not come until after the late January inaugurations. Thus, a Biden stimulus is likely greater in dollars, but timing and targeting likely less optimal in our view.

Read more at Americas CIO View as of 10/16/20

Only two more weeks to go until Election Day. Indeed, almost 28 million votes have already been cast nationally, corresponding to 20% of the total turnout in 2016.¹ Time for one more update of our U.S. election probabilities. It is probably going to be the final one.

For the White House, we currently see a 75% probability of a Democratic win, with 25% for the Republican nominee winning. As for combined Congressional and Presidential results, the probabilities for a Democratic sweep, a Republican sweep and various forms of divided government are 53%, 7% and 40% respectively.  Of the 40% divided government, roughly 14% corresponds to the status quo, i.e. Trump winning re-election, Democrats holding on to the House and Republicans to the Senate. The remaining 26% largely correspond to a new Biden administration facing at least partial Republican control in Congress, notably a 20% probability of Republicans holding on to the Senate despite a Biden win, while failing to win back the House.

Click here to read the complete article.

According to pundits, ”The Pence-Harris ‘debate’ was civil, contentious and not very enlightening.”¹ We disagree. Its very blandness made it enlightening. Much of the exchange could have taken place between any two major party candidates at any point during the past 36 years. Very little of what Vice President Pence said would have sounded out of place in an administration led by Jeb Bush, say, or Marco Rubio. Which is interesting, because it illustrates that neither side has quite learned the lessons of 2016 yet. Neither Pence, nor, it increasingly seems, the Trump campaign as a whole, quite understands or remembers how Trump won last time around.

Back then, there was no such thing as a “Trump base.” Instead, there were at least 5 clusters of voters with widely varying views on everything from trade and economics to race and identity, according to a large survey of the non-partisan Democracy Fund Voter Study Group (see chart).² In particular, Trump’s core base in the Republican primary ("American Preservationists") strongly felt that the economic system was biased in favor of wealthy elites and favored raising taxes on wealthy households. Similarly, Trump was only able to eke out his Electoral-College victory in large part thanks to economically and socially progressive voters who disliked the establishment in general and Hillary Clinton in particular (the "Anti-Elites" cluster – see chart). Such voters hoped Trump would be able to strike deals with Congressional Democrats to boost spending on infrastructure, reign in Wall Street and tackle climate change. Having such fractious electoral coalition has made it hard to govern.³

Since 2016, President Trump has been losing ground (most notably in mid-terms) among all groups not previously supportive of Republican orthodoxy. Covid-19 merely accelerated this erosion. All of which helps explain why, barring further last-minute shifts, the Bidden-Harris ticket seems pretty well positioned. However, Democrats too still have some thinking to do. Even in a wave election, they risk falling short in the Senate, due to its small-state bias.⁴ If they win, there will be a strong temptation to “neutralize the pro-GOP” biases in various governing institutions via constitutional tinkering, such as granting statehood to Washington DC and Puerto Rico. Independently of the merits of any such steps, they should not be driven by hard-to-predict electoral considerations. It is far from clear, for example, that Puerto Rico would actually favor Democrats over Republicans.⁵

Instead, Democrats need to continue rebuilding their local presence nationwide. Indeed, the looming down-ballot Democratic tsunami in state legislatures may well turn out to be this election cycle’s biggest, under-covered story. In any case, the Senate and Electoral College were deliberately designed to ensure that voters in small states could make their voices heard in faraway Washington. The Trump revolt took the Clinton campaign by surprise, precisely because it was strongest in small-town, small-state, rural America from the nation’s bustling centers of commerce and culture.   

At the time of writing, it appears that the vice presidential debate might be the final one of the current cycle. After a string of bad polls for Republicans, the trajectory for the rest of the race might now be set. Following the Covid-19 outbreak at the White House, we have put our probability ratings (last updated in August) under review. We plan to publish an update in the course of next week. In the meantime, visit our Election Web page on dws.com for additional perspective on this and other topics. Direction wise, we expect the probability of President Trump (or another Republican) winning the Presidency to decline (from currently 35%).  Meanwhile, the probability of a Democratic sweep (Democrats winning the Presidency and control of both Houses of Congress) looks likely to rise, probably above 50% (from 42% currently).

Comparison of Trump voters on a political map

We are pleased to share this special report ahead of the U.S. Presidential election in November. Over the past few months, candidates have detailed a wide range of proposals to change tax code, government spending, immigration, and other policies. While some proposals can be implemented via executive orders and agency personnel appointments, many significant proposals require legislative changes, which are likely to prove challenging unless one party controls both chambers of Congress.

Key highlights of the report:

• People generally overestimate the impact of federal elections on real estate.
• On Election Day, we see two differentiated outcomes: a Democratic Sweep and everything else. Though we are in no way in favor of or promoting any specific outcome, we expect a Democratic Sweep to result in the most notable policy changes. Under a Divided Government or a Republican Sweep, we largely anticipate a continuation of the status quo.
• Policy changes resulting from the 2020 elections may impact certain property sectors or markets, but are unlikely to significantly impact real estate overall.
• For real estate investors, cyclical considerations, such as the pace of the economic recovery, and secular trends (e.g. e-commerce) will have the greatest impact. Real estate investors should also consider the impacts of state and local elections where issues such as real estate taxes and rent regulation are on the ballot.

Click here to read the full report.

Simon Wallace Co-Head of Real Estate Research & Strategy	Kevin White Co-Head of Real Estate Research & Strategy

When it comes to addressing the climate emergency and the broader ESG agenda in the United States, significantly different assessments and pathways are being taken by the Republican and Democratic parties.

The Democrats are espousing an ambitious green agenda while President Trump has been scaling back or revoking many aspects of Obama's environmental agenda. These include the decision to leave the Paris Climate Agreement in June 2017, repealing the Clean Power Plan in October 2017 and diminishing the role of the Environmental Protection Agency, where criminal enforcement is now at a 30-year low.¹ This is in addition to successive rulings by the U.S. Department of Labor that ESG may conflict with fiduciary duty and the SEC's decision at the end of last year to amend shareholder rights, which will raise additional hurdles for investors to raise ESG issues with companies.²

We expect a re-election of President Trump would maintain the status quo with little to suggest the administration would seek to promote the transition to a low carbon economy. Rather the administration is likely to safeguard against any legislation that would discriminate against the fossil fuel industry and so preserve the United States' status as the world's largest producer of oil and natural gas.³ Indeed at the start of this year, the President had stated his intention to relax environmental law to facilitate infrastructure building in areas such as roads and pipelines.⁴

In contrast, a Democratic sweep across the executive and legislative branches would foster the reintroduction of much, if not all, of the Obama environmental legislation and an immediate decree to re-join the Paris Climate Agreement. This legislative change would provide the most obvious tailwinds to ESG-focused investments. Sectors likely to benefit include renewables, building materials, energy efficiency and e-mobility technologies in the transportation sector. Defensive and secular growth stocks would also be positioned well to withstand these significant changes. However, risks to a Democratic sweep would include U.S. domestic earnings, which would likely experience hikes on corporate tax rates. Meanwhile, we would expect traditional fossil fuel companies to be exposed to a more aggressive decarbonization legislation.

A clear difference therefore exists between the Republican and Democratic parties when it comes to their position in addressing the climate emergency and the ESG agenda more broadly. The Democrats are placing carbon neutrality at the heart of their campaign compared to a Republican administration that limits any policies that could threaten the competitiveness of the U.S. economy and specifically the fossil fuel sector.⁵

While FOX News called the debate "full of fiery exchanges, insults", CNN just found it "an absolutely awful debate". Anyone who expected facts to shape the decision on who to vote for was probably disappointed. Especially sensible topics like the pandemic, healthcare or taxes ended in a skirmish of words. Moderator Chris Wallace had difficulties to gain control over the discussion. Some straight content was provided by Biden, in the few moments he was able to follow his line of argumentation without interruption. Under his presidency, Trump’s tax reform would be rolled back to some extent, and corporate taxes would be raised to 28%. President Trump meanwhile wants "… crystal clean water and air."

At this point in time, we do not see any reason to change our election probabilities. For one, it was the first debate, and while both candidates might have pleased their hard core fans (Trump probably more so than Biden), it seems unlikely that they have convinced anyone else. Probabilities on the betting platform "PredictIt"¹ shifted slightly in favor of Joe Biden right after the debate. From a market perspective, the prospect of higher corporate taxes is certainly not welcome news, however it is making its way into valuations already.

The U.S. infrastructure market is proving resilient in 2020 notwithstanding Covid-19, with 217 billion dollars of transactions reaching financial close so far.¹ Infrastructure investors seem less concerned about the macroeconomic cycle when accessing the market, but the same may not be true when considering a potentially changing policy landscape. The U.S. presidential election may be a pivotal moment for the future strategies of investors in U.S. infrastructure.

Today, the U.S. infrastructure market is one of the largest globally.² Historically, the energy sector has represented the largest share of capital flow, with most transactions closing in the midstream³, liquefied natural gas, power, utilities and renewables sectors. The municipal-bond market, as a competitive source of funding, has limited the involvement of private capital in transportation and social infrastructure, particularly if compared to other developed markets, such as Europe.

U.S. transportation and social infrastructure currently see a 2 trillion dollar investment gap over the next decade, as low public investment has led to deferred maintenance, with the conditions of U.S. infrastructure being "mostly below standard," according to the American Society of Civil Engineers.⁴

From a policy perspective, this gap has not remained unnoticed. In recent years, a number of initiatives tried to support infrastructure, removing barriers to private capital. U.S. states have developed Public Private Partnerships (PPPs)⁵, but projects were limited so far.

In case of a Republican win in the upcoming U.S. presidential election we expect infrastructure investment to be a key area of focus to support economic recovery post Covid-19. However, we would see a gradual evolution of policy, and a more gradual transition to clean energy, led mainly by market forces, rather than policy, as renewables gradually achieve grid parity.

A Democrat win may see a faster transition to clean energy and renewables, such as through the introduction of a carbon tax. As a result, we would expect more investment in grids, battery storage, and a stronger promotion of transport electrification, in an attempt to reduce emissions, and support a nascent low carbon economy.

What seems clear today, is that some megatrends, particularly digitalization, may increasingly support the pipeline of infrastructure investment in the future independently from the election results. Demand for connectivity and data volumes continue to accelerate, supporting the outlook for investment in fiber and datacenters.