As of August 17th, Joe Biden led national polls by 7% on average, and importantly, was ahead in most battleground states. Biden’s large lead strongly indicates the Democrats will maintain a majority in the House of Representatives, but his lead is large enough that it gives Democrats legitimate hope of also winning a Senate majority. It is generally understood that when one party controls the White House, the House and the Senate, passing legislation is easier as it requires no buy-in from the opposing party.
It is important to remember that in the long run, who sits in the White House has little bearing on the direction of stock markets. However, there can be market volatility both before and after the election has taken place. With that said, let’s take a look at Joe Biden’s platform and its potential market implications:
Biden proposes a host of changes to the tax code, which would impact both corporations and high-income households:
- Corporate tax increase from 21% to 28% (was 35% prior to 2017)
- Imposing 15% minimum tax on profits
- Doubling the existing minimum tax on profits for foreign subsidiaries of U.S. firms from 10.5% to 21%
- Personal Income exceeding $400,000 increased from 37% to 39.6%
- Personal Income exceeding $1,000,000 would see dividend and capital gains income taxed the same as normal income
- Investors potentially selling stocks to avoid higher tax rate
- The most significant income tax increase since the periods following the World Wars and the Great Depression
- Note that given the downturn, tax increases are likely inevitable regardless of which candidate wins
HEALTH CARE PLAN
Biden wants to improve upon the Affordable Care Act (i.e. Obamacare):
- Increase financial support to those struggling to afford insurance
- Provide a government-run option to compete against private insurance
- Lower Medicare eligibility from 65 to 60
- Plan cost estimate is $750 billion over 10 years
- Increased government spending thus continuing the deficit from previous administrations
- Effect on healthcare stocks, lowering profitability
- Note that drug companies are likely to be hit with price controls regardless of who wins as Trump – in an effort to pre-empt the Democrats – recently signed Executive Orders aiming to lower prescription drug costs
$2 trillion, four-year plan proposed for green energy, Biden’s most expensive platform proposal:
- The proposal calls for fossil fuel use in cars, as well as to generate electricity, to be eliminated by 2035 with the economy becoming net-zero carbon emissions by 2050
- Does not include ban on oil and fracking (Ohio and Pennsylvania, two key battleground states, have significant fracking operations and proposing a ban would hurt him in these states)
- Significant increase in governmental spending
- New restrictions and tightening environmental regulations, reducing subsidies to fossil fuel companies
- Increased focus on green energy companies
The belief is that the tense U.S.-China relations will keep big U.S. tech companies from being broken up, since neither party wants U.S. tech companies to become much smaller than their Chinese counterparts. However, there is an increasing appetite for stronger regulations on the tech firms, and remember that Biden’s 15% minimum corporate profit tax would impact the tech giants, who currently pay almost no tax.
The U.S. federal deficit – and debt level – is ballooning. Neither party has produced a platform whose tax increases (revenues) and/or budget amendments (expenses) come close to financing their agendas. Further increase in the federal debt could force the U.S. government to keep rates lower than inflation to help the government chip away at its debt level (similar to post-WWII). Lower rates tend to fuel equity markets, as access to cheap money can help companies expand their internal infrastructure, hire more people, etc.
A tight election result could cause a significant market disruption, especially if one candidate refuses to accept the results. President Trump has repeatedly claimed the election process is “rigged” and has set the stage to challenge the election’s legitimacy if he loses. Mail-in ballots are unlikely to be completely counted for days or weeks after the November 3rd election. 24% of votes in 2016 were cast via mail-in ballot, and that number could increase as people attempt to avoid COVID infection as the virus continues its spread throughout the fall.
The most recent example of a drawn-out election occurred in 2000, when Al Gore did not concede defeat until well into December of 2000, about 6 weeks past the election day.
A Democratic sweep of the White House, the House and the Senate would likely result in the most market movement in the near-term. However, the Democrats’ promise to increase spending should help to stabilize rocky markets. An outcome where the Senate and House are controlled by opposing parties would require opposition buy-in to enact significant legislative change.
There is no proven link between a president’s party and market returns. Ultimately, investors should focus on things they can control, such as their rate of savings, utilizing existing tax laws to their best advantage, and of course, remaining invested in a well-diversified, high quality portfolio.
Sources: National Bank, Forbes