A potential Bernie Sanders presidency is slowly becoming a concern on Wall Street that rivals the escalating coronavirus crisis.
Conventional wisdom suggests investors are spooked by the prospects of the virus mutating into a worldwide pandemic, especially with multinational supply chains being hammered and travel restrictions imposed on the world’s 2nd largest economy. The appearance of the virus in California has heightened those concerns, which walloped stocks on Thursday.
However, at least a few investors see Sanders’ rise — and the failure of a more moderate candidate to emerge from the crowded Democratic field — as a growing risk to markets. Billionaire bond king Jeffrey Gundlach recently warned that Sanders could trigger a market correction, a sentiment he reiterated on Wednesday to CNBC.
In a lengthy research note published on Thursday, RBC Capital Markets noted that “investors may have been rattled by [former New York City mayor Mike] Bloomberg’s loss of momentum, not just Sanders’s surge,” amplified by a “high degree of nervousness about the coronavirus.”
Sanders is currently the frontrunner to challenge President Donald Trump in the fall, with victories in New Hampshire and Nevada giving him momentum. RBC also remarked on the “enthusiasm and dedication of his supporters,” which could make the general election more competitive if he prevails in the Democratic primaries.
“We think it’s no coincidence that the S&P 500 (^GSPC) peaked alongside last week’s Democratic debate in Nevada, which was generally viewed as a bad night for Bloomberg and a good night for Sanders” and Massachusetts Senator Elizabeth Warren,” RBC wrote.
“We expect a close race in November and think investors are correct to take Sanders’s surge seriously,” the bank added.
‘This is a story about Bernie Sanders’
Global markets have swooned as the pathogen spreads to a successive number of countries outside of China, including South Korea, the U.S., Italy, Iran, Germany and Brazil.
Yet Lee Munson, chief investment officer of Portfolio Wealth Advisors, told Yahoo Finance on Tuesday that the rise in volatility is really “a story about Bernie Sanders.” Munson pointed out that losses in Europe, and more risk-sensitive emerging market assets, have lagged the deep plunge in U.S. markets.
“If this is really about coronavirus today, we should see emerging markets down 4-5% ... but that’s not the case,” he said. “This is about Bernie Sanders, this is about policy, and this is the correction we were looking for ahead of Super Tuesday.”
And just days ago, the president himself — who’s assiduously claimed credit for a market that hit new records just last week — blamed the Vermont senator for the recent downturn.
No ‘hope of sanity’ from Bloomberg
Sanders’ rise has been juxtaposed against the waning fortunes of Bloomberg. The billionaire has stumbled badly in his effort to position himself as a centrist alternative — something Munson said was not lost on investors who fear Sanders’ tax-and-spend agenda.
Eurasia Group estimates that Sanders has a 40% chance to secure the nomination, held back by his vulnerabilities as a general election candidate, but sees a 55% chance that a moderate will eventually prevail.
Whether that person is Bloomberg, however, remains to be seen.
“We thought that Bloomberg was going to be maybe this hope of sanity — [he’s] not,” the investor told Yahoo Finance. “The guy showed poorly. I think this is all about politics,” Munson said.
Munson pointed to a sharp drop in the UnitedHealth’s (UNH) stock — which plunged by nearly $20 in Tuesday’s session. Sanders’ embrace of a national health care system has unsettled health care investors, and even some companies.
“There’s this thought that a socialist is going to do Medicare-For-All,” Munson explained, echoing RBC’s analysis that showed health care, financials and energy have “the highest degree of risk” under a theoretical Sanders presidency.
“Health Care has been one of Sanders’s signature campaign issues, with his support of Medicare for All, capping prescription drug prices, and elimination of medical debt,” the bank wrote.
The policy backdrop would also be onerous for financials,” RBC wrote — based on his embrace of breaking up big banks, re-establishing financial sector firewalls and eliminating student debt, among other things.
“The same is true for energy due to his support of the Green New Deal and his desire to ban fracking and reduce carbon emissions,” it added.
Munson said that what's driving markets down is a combination of virus fears and a possible Sanders' presidency. “That’s what’s going on, it's just that we have 2 different things going on at the same time, and you have to differentiate where [you] want to buy,” he added.
Javier David is an editor for Yahoo Finance. Follow him on Twitter: @TeflonGeek