Historic March Primaries Narrow the Race—Now What? - Wells Fargo Investment Institute

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Historic March Primaries Narrow the Race—Now What?

Wells Fargo Investment Institute - March 13, 2020

by Paul Christopher, CFA, Head of Global Market Strategy

Key takeaways

  • Between February 29 and March 3, former Vice President Joe Biden scored 11 primary wins in four days, an unprecedented reversal of fortune in the modern primary era. His momentum continued with a strong showing in the March 10 primaries.
  • The race for the Democratic Party’s nomination has winnowed to two candidates remarkably quickly and the former vice president is likely to arrive at the convention as the presumptive nominee. We review the trends and factors to watch during the remaining primaries, and we preview the probable key trends heading into November.

What it may mean for investors

  • While the elections will be important, the coronavirus threat to the economy introduces the preeminent political and economic uncertainty. We most favor patience and proactive risk management, and we reiterate our recent guidance changes.

Betting odds have shifted sharply to favor former Vice President Biden to be the Democratic Party’s nominee. Beginning with the South Carolina primary, Biden came from far behind to win 11 states over four days. In the modern primary-convention era, beginning in 1972, no candidate has enjoyed such an abrupt surge. Over roughly that same period, five rival candidates suspended their campaigns.

With the race concentrating on two, principal candidates, Biden added to his momentum in the March 10 primaries. He carried Missouri, Mississippi, Idaho and Michigan – the prize of the day, with 125 delegates, and a likely battleground state in the general election. Michigan is a particularly important test. President Trump narrowly carried this demographically diverse, Rust Belt state in 2016, but Biden’s primary win was significant. Sanders carried the state in the 2016 primary, but Biden won by 16 points in 2020 and swept every county.

Since early in the primary season, we have viewed as a key question whether voters in the Democratic primary would select a candidate based more on ideology or electability (that is, perceived ability to beat President Trump). In Iowa, New Hampshire and Nevada, Senator Sanders had solid support from younger voters, but other demographic groups’ support was divided among the remaining candidates.

Beginning with South Carolina, voters appeared to make their choice. As Biden kicked off his comeback, five rival candidates suspended their campaigns between that primary and Super Tuesday, four days later. Exit polls in Michigan added to the evidence that a consensus has emerged: ABC News reported that 57% of in-person voters said a candidate’s electability was more important than ideology.1

Factors to watch

Heading into Tuesday’s primaries in Arizona, Florida, Illinois, and Ohio, some uncertainties remain, and we next consider what may be the main factors as the primary season continues.

In the remaining primaries (mid-March through mid-July):

  • The final debates: The debates are a good forum for challenger Sanders to push the former vice president into a verbal gaffe or to advocate more progressive policies. Although any campaign can implode under some mistake or revelation, it will have to be a serious issue to dent Biden’s momentum. Sanders has a chance to provoke a critical Biden mistake on a national debate stage in Phoenix (March 15) and at the April debate (not yet scheduled). Pushing Biden leftward may be the more feasible tactic. Earlier in the campaign, the former vice president moved toward progressive positions on energy and the environment, for example, and pressure may push him further on issues such as taxation.
  • The big primaries to come: Table 1 shows the upcoming primaries with the largest delegate totals. The average of polls in each March 17 primary state shows Biden with a majority of support and at least a 10 point lead over Sanders. 2 Short of a major Biden mistake, Sanders’ main hope (albeit small) is that he can capture a state like New York, where Biden does not have a majority in the polls. Such wins may help block Biden from a majority of the pledged delegates and thereby build leverage for Sanders to use at the July convention.

Table 1. Upcoming primaries that offer at least 100 delegates

Table 1. Upcoming primaries that offer at least 100 delegates

Source: Associated Press, March 11, 2020

Beyond the conventions (August – November):

  • Turnout: Turnout was strong on March 10, particularly in Michigan. In 2016, Sanders won 595,222 primary votes.3 In 2020, he won nearly the same (576,916 votes), but nearly 400,000 more people voted in the 2020 primary than in 2016.4
    Missouri also offers some clues about candidate appeal. Exit polls showed that Sanders lost college-graduates by 19 points in 2020. He won that group by 14 points in 2016. These statistics suggest that Biden has strong appeal and can generate turnout. If this pattern extends to battleground states like Pennsylvania, Wisconsin, and Ohio, President Trump may find an uphill race in the fall.
  • Arms locked after the convention: Sanders has commanded a solid proportion of mostly younger voters, and they continue to turn out for him in the primaries. Will these voters feel disaffected after the convention? If they stay home on Election Day, it could be an important disadvantage for the party.
  • Coronavirus uncertainty: The evolving health and economic implications make an important wild card in the months to come and complicate the job of predicting a winner in November. President Trump could take a strong advantage if his administration leads effective efforts that contain the economic impact early in the year and allow the economy to mount a rebound later in the year. If, by contrast, the economy stumbles into recession, history does not favor his re-election bid.

In summary, it may be premature to wrap up just yet the Democratic convention’s outcome – even moreso the November election. Sanders still may wield significant leverage on the outcomes. If Sanders commits himself to challenging Biden until July, he could force Biden into damaging gaffes, or into a lurch leftward on policy, or could exchange his support for concessions at the convention. Alternatively, his supporters could refuse to support Biden as a nominee, and risk a repeat of 1968, when progressives refused to back Senator Hubert Humphrey in his loss to President Nixon. Last, but not least, the full coronavirus impact is impossible to calculate yet.

Ideas for managing risk amid market uncertainty

We believe that the U.S. economy will continue to grow but that recession risks are rising materially. Whether a recession develops depends upon how long it takes to contain the spread of the coronavirus, and how well policymakers support the sectors of the economy most adversely affected. In the meantime, patience and a proactive approach to managing risk are essential tools for long-term investors during periods of market stress. Put simply, we favor reallocating from markets we believe are overbought to those that seem oversold. All our recent changes fit into the direction of that broad guidance:

  • We favor reallocating from fixed income to equities, specifically to U.S. Large Cap and U.S. Mid Cap equities from short duration fixed income.
  • We prefer to reallocate from Developed Market ex-US equities into oversold commodities (particularly crude oil) and gold (which still has good value).
  • We see relatively greater risk in U.S. Small Caps and international developed and emerging market equities.
  • We continue to prefer cyclical or growth-oriented equity sectors, but those that have stronger quality attributes – including the Information Technology, Communication Services, and Consumer Discretionary sectors.5
  • We remain unfavorable on those sectors—Energy, Industrials, and Materials—where we feel inferior quality and impact from the coronavirus leave expected risk larger than prospective reward. 

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1 abcNEWS, “Trust in a crisis bolsters Biden’s electability argument”, March 11, 2020.

2 See fivethirtyeight, “latest polls”, March 11, 2020.

3 The New York Times, “Michigan March 8 primary results”, September 29, 2016.

4 The New York Times, “Live Results and Coverage: Michigan Presidential Primary 2020”, March 11, 2020.

5 Quality has many definitions, but late in an economic cycle we identify quality as good cash flow, favorable cash/debt ratios, and above-average potential earnings growth.