As of early May, there is no talk of the US federal government not providing more money to help Americans through the economic crisis brought on by the COVID-19 pandemic. However, as the national elections of November 2020 get closer, continued aid funding could be delayed as legislative debates become increasingly politicized.

April Negotiations
As funding for the $2.2 trillion Paycheck Protection Program (PPP) nearly ran out in mid-April, partisan debate flared over how to provide further aid money to the Small Business Administration (SBA) – which includes millions of small companies and their workers. Some of the money from the initial SBA package was held up by administrative and distribution challenges. In reaction, Republican legislators sought a more streamlined approval process for the subsequent funding bill. However, Democratic legislators argued that the next round should include requirements ensuring it reaches hospitals, welfare recipients, and state and local governments. Final legislation approved by both the Senate and House included an additional $310 billion for the PPP, $75 billion for hospitals, and $25 billion for COVID-19 testing. The national debate over when and how to lift COVID-19 lockdowns seemed to help set the stage for even more partisan rancor as attention has turned to the coronavirus aid package in early May.

Evidence of Economic Damage
Companies that began reporting Q1 numbers in April have started to shed light on the breadth of economic damage resulting from the pandemic – including worst-ever declines in retail sales and US GDP. What’s more, unemployment numbers remain staggering – jumping from a 50-year low of 3.5 percent in March to 15 percent in May. Q2 numbers for the April through June period are likely to be worse than Q1. Clearly, additional relief funding will be needed to help millions of businesses and individuals weather the economic downturn.

Pandemic Politics
In just two short months, COVID-19 has dramatically changed the 2020 election landscape. Early campaign dynamics – including local and state races, congressional races, and the presidential elections – are unprecedented, with candidates being prevented from holding traditional campaign events and rallies and forced to communicate with voters through web conferencing.

Moreover, the ways in which governors are handling continued COVID-19 lockdowns, or in some cases opting to reopen states from quarantine protocols, have also been politicized. The perception – rightly or wrongly – is that more conservative-leaning states and regions are eager to end the lockdown and return to more normal activity, while liberal-leaning states and regions remain hesitant.

Legislators are aware of these tensions, which are likely to increase as the November elections draw nearer. Early May discussions in Washington around the size and scope of the next COVID-19 federal aid package have already proven difficult. President Trump has suggested that Congress consider including payroll and capital gains tax cuts in any new legislation, while pulling funding from “sanctuary cities” and states that have opposed his administration’s immigration policies. In the meantime, Democratic Party lawmakers have signaled their own priorities, which reportedly include several years of funding for healthcare workers and civil service employees, in addition to expanded funding for COVID-19 testing and contact tracing, prolonged unemployment benefits, and aid to homeowners and renters.

Elections in the Time of COVID-19
The total dollar amount of the next federal aid package – and the fine print addressing who and what it is designed to help – will be influenced in part by near-term data on new COVID-19 cases and deaths. It will also be informed by how states that have opted to reopen fare in the early weeks of their restart.

In terms of political calculus, Democratic Party legislators are likely to remain mindful of attracting progressive supporters of former presidential candidate Senator Bernie Sanders, while focusing on both retaining and growing their appeal among more centrist voters who look favorably upon former Vice President Joe Biden, the party’s nominal presidential candidate.

Meanwhile, the Republican Party remains the party of President Trump, who will continue to use his Twitter account and preferred media channels to connect with an energetic base and burnish his image as an unpredictable and unconventional executive who is unafraid to take on the status quo – both domestically and internationally. Trump is poised to take credit for everything the federal government has done in response to COVID-19 that has proven effective, while boldly overlooking – or denying – any missteps. The development and deployment of a COVID-19 vaccine or treatment would no doubt prove to be a giant political win for the president as he seeks reelection. As in previous elections, Trump will likely relish the role of Republican Party kingmaker, making full use of the presidential pulpit to elevate his supporters and castigate his detractors among GOP candidates up and down the ballot.

All Eyes on Washington
Moving forward, one of the biggest questions for investors and market analysts to consider will be whether or not partisan rancor in the run-up to November elections becomes so fever-pitched that it prevents passage of further federal COVID-19 aid. An intensely partisan atmosphere could prove particularly damaging to markets in light of a significant second wave of infections, or if current caseloads do not significantly decrease. The economic effects of the pandemic will probably be substantial and lasting. Federal aid legislation has been central to the country’s resolve in the face of an unprecedented challenge. Should an aid bill be passed in May or early June, it may also be pertinent to ask – will it be the last? It’s a question that might be important for markets to consider through the summer months and into the fall.
This material is provided for informational purposes only and should not be construed as investment advice.

The views and opinions expressed may change based on market and other conditions. Unless otherwise noted, the opinions of the speakers provided are not necessarily those of Natixis Investment Managers or any of its affiliates. All investing involves risk, including the risk of loss. Investment risk exits with equity, fixed income, and alternative investments.

There is no assurance that any investment will meet its performance objective or that losses will be avoided.

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