By: Neal Davis, CFA - Senior Portfolio Manager & Research Analyst
This year has been a turbulent one, as much of the news and market fluctuations have been centered around the COVID-19 pandemic. Even with COVID-19 still very much in the news, investors are already starting to look beyond the virus and out to the election that is several months away. As new polling data and approval ratings for President Trump project a challenging path for his reelection campaign, some investors are pondering the outcome of a potential win by former Vice President Joe Biden and his proposed policy changes. So, what might investors expect for the next four-plus years?
As of the middle of July, various polls show President Trump trailing Biden, with some as wide as double-digits. While these polling leads are substantial, polls may not reflect actual results. Polls can be an imperfect measure, as there tend to be biases in the data sampling, and voter turnout can factor into the eventual outcome.
However, if Biden is elected President, we could anticipate some policies that could be distressing to equity markets. The primary concern would be that he may push for an increase in the corporate tax rate from 21% to 28%, which would be a partial rollback of President Trump’s tax cuts in 2017. This would diminish corporate profitability and would likely pressure stock prices. However, companies could adapt to the higher tax rate through cost saving measures, price increases, or a reduction in share buybacks. Additionally, Biden would likely push for more regulations, particularly in the banking and energy sectors. Naturally, this would impact stock prices in those sectors, but tactical shifts in portfolios could be made in anticipation of such a move. Lastly, he may push for a $15 minimum wage. Many businesses with low-income earners could adjust to the increase in wages by cutting costs, raising prices, or by replacing manual labor with technology. Alternatively, some of those plans could be delayed to prioritize policies for economic recovery and job creation, as we eventually emerge from the COVID-19 crisis.
There could be some offsetting positive aspects for market participants if Biden is elected President. We might see an improved relationship with China and other foreign economies. China is the second largest economy in the world with many large U.S. corporations relying on China for inexpensive imports and their purchases of U.S. goods overseas. Global markets would applaud easing tensions with China and a rollback of tariffs. Biden also just unveiled an infrastructure spending plan that has earmarked $400 billion towards expanding green energy vehicle technology, steel production, and other building materials. Additionally, he has proposed spending another $300 billion on 5G cellular and artificial intelligence. His $700 billion plan is projected to create 5 million jobs.
Some analysts argue that perhaps the best outcome for the markets if Biden were elected as President would be a divided Congress. Democrats are favored to retain the House majority. The outcome for the Senate, which is now controlled by the Republicans (53-47), is less clear. At this point, the Republicans are projected to hold a narrow margin. If so, Biden would likely be unable to increase corporate taxes or impose regulations. Couple that stalemate with a more diplomatic approach to foreign policy and trade, and it could be a nice tailwind for the markets.
On the other hand, if President Trump is re-elected, much could remain the same, although he has yet to fully unveil his plans for his second term. In a recent interview, he mentioned goals to “defeat the invisible enemy”, rebuild the economy, and bring back foreign jobs to the U.S. Those plans would be welcome news for Wall Street, especially if he presented a clear path to achieve those goals. His policies thus far have been business-friendly, so we could expect to see more of the same if elected for a second term. There are still concerns that some of his foreign policy regarding jobs and trade could unsettle the markets, but investors and companies have mostly been able to adapt to those changes.
Trying to “time the market” ahead of an uncertain outcome is always extremely difficult even with the best information available. Whether it is an election, COIVD-19, or some other event, some assets will perform better than others, which is why a properly diversified portfolio is paramount.
Buckingham Advisors will continue to digest information on the election as it becomes available and provide updates. Please look for more commentary as well as webinars on this topic in the upcoming months from your Buckingham team.
Disclaimer: Buckingham Advisors is not endorsing either candidate or a political party.
Neal Davis, CFA
Senior Portfolio Manager & Research Analyst
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.