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As Election Day approaches, former Vice President Joe Biden leads in betting markets and most polls.
A “blue wave” appears possible, with the Democratic Party retaining control of the House and gaining a majority in the U.S. Senate but betting markets and polls are not always right. Consensus expectations of a Clinton victory and “British exit” in 2016 proved incorrect. Investors are considering the implications of the presidential election as well as the outcome of the tightly contested race for control of the U.S. Senate.
There also is the unlikely but not impossible scenario in which the election results are inconclusive or contested for an extended period.
Equities fared poorly in 2000 while the presidential election between President George W. Bush and former Vice President Al Gore was in dispute. It would likely be far worse for equities if this election became contested. Under the U.S. Constitution, the presidential inauguration must take place on Jan. 20, so the period of elevated uncertainty and conflict could magnify volatility but would be time-bound.
The presidential candidates have dramatically different policy priorities. The election scenarios cited above create different implications for equity markets:
1. Re-election of President Donald Trump. Trump’s second-term agenda would mostly be a continuation of his first-term agenda. Tariffs would remain central to Trump’s trade policy where the trade war between the U.S. and China would likely resume. Tariffs targeting Europe would also be a likely consequence of a Trump re-election. U.S. equities could be a near-term relative haven for investors, though Chinese equities will increasingly become important to investors in a world in which China and the U.S. compete for global leadership. Small-caps and technology stocks would benefit from a continuation of Trump’s first-term tax cuts.
A sustained reopening of the economy would also boost small-cap stocks, regardless of the election results. A divided Congress would be a continued obstacle for Trump’s legislative agenda but infrastructure could be a rare source of common ground. Rural broadband to bridge the digital divide is popular among both parties and could be central to an infrastructure bill that would draw support from both parties. With Trump likely to be stymied on legislative initiatives, executive orders and deregulation will dominate Trump’s policy agenda. Regulatory actions targeting individuals companies would be more prevalent in a Trump second term than under Biden.
2. A blue wave. A blue wave would be more consequential than a Trump re-election from a legislative perspective. The policy agenda for Democrat presidential nominee Joe Biden calls for more government spending and higher taxes for individuals and corporations. Biden’s corporate tax agenda includes a reversal of Trump’s cuts to statutory rates and tax base broadening provisions that would impose a minimum tax and increased taxes on overseas earnings.
Small-caps and technology companies are among the segments of the market that would be hit hardest by Biden’s tax plan. Taxes on individuals and estates would also rise under Biden, making municipal bonds an even more appealing investment option. With the economy still healing from the pandemic and the likelihood of a slim majority in the Senate, Biden may prioritize spending initiatives over controversial tax hikes in the early part of his presidency.
Biden’s spending agenda includes pandemic relief, infrastructure spending, an expanded public option for health care and spending to combat climate change. Alternative energy stocks have already rallied in anticipation of a Biden presidency, so the potential post-election upside for renewables may be less than expected. Tensions between the U.S. and China are likely to persist regardless of election results, but a Biden presidency would emphasize bilateral rather than unilateral actions and trade policy would follow more of a predictable arc.
Although the technology sector would face additional tax burdens under Biden, a more predictable trade policy would help a sector that derives substantial revenue from outside the U.S. International and emerging-market stocks would likely benefit.
Wall Street has generally supported the Biden campaign. An economic recovery helped by fiscal stimulus would allow banks to release some of the hefty provisions against bad loans built up this year, while modestly steeper yield curves would boost net interest margins. But the outlook for bank stocks is clouded by regulatory uncertainty, as it is unclear how much Biden will be influenced by prominent Wall Street critics such as Sen. Elizabeth Warren and Sen. Bernie Sanders.
3. A Biden victory with a GOP Senate. If the Republicans retain control of the Senate, Biden will have to scale back his legislative platform. Biden’s legislative agenda would probably center around pandemic relief and infrastructure spending, with rural broadband access being a bipartisan priority regardless of who wins the election.
President Trump reversed many of the regulatory initiatives of the Obama administration. For example, Trump has rolled back many environmental rules and regulations. Trump’s deregulatory actions would be subject to reversal if his rival wins. Biden could implement significant policy changes by issuing directives to regulatory agencies and other government departments, including tightening auto emissions and power plant standards and re-regulating methane leaks.
The market outlook is more complex than political headlines imply, so it is important to consider but not overreact to election-related narratives.
The pandemic remains the most important near-term factor influencing the direction of economic growth and equity returns. Investor confidence is likely to rise if there is meaningful progress on a COVID-19 vaccine. Regardless of who is in the White House, the market will likely go up if the pandemic is brought under control and go down if it does not.
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