Whether the upcoming presidential election is a battle for the soul of the nation or the way to keep America great is a question we will leave to you to answer. But the election will have important ramifications for your financial wellbeing, and we’re all over that agenda. How will each of the candidates help steer the economy? What might your tax bill be? Is your portfolio headed for gains or losses?
For those questions, the person living at 1600 Pennsylvania Avenue for the next four years matters.
At the start of the year, a sound economy, rock-bottom unemployment rates and a roaring bull market made it Donald Trump’s election to lose. Then came the coronavirus pandemic, exacting a vast and tragic human toll, putting a dramatic end to the longest economic expansion and bull market on record, and robbing tens of millions of Americans of their livelihood.
It remains to be seen whether voters will renew President Trump’s lease on the White House in November, but former Vice President Joe Biden became a more formidable contender over the summer, if you believe the polls and the betting markets. In early July, policy analysts at investment firm Raymond James gave Biden a 55% chance of winning the presidency.
But it bears repeating that the circumstances surrounding the 2020 election are unique, and for insights into who will ultimately claim victory, you might be better off asking an epidemiologist than a political consultant. Each of the presidential candidates faces “significant challenges,” according to analysts at Wells Fargo Investment Institute. “Voter perception of how President Trump manages the pandemic and economic reopening is key to his reelection bid.”
What is clear is that the country has rarely been more polarized. “The U.S. presidential election [is] set to take place against the most tumultuous domestic backdrop since 1968,” write analysts at BlackRock Investment Institute in their 2020 Midyear Outlook. “The two parties are as far apart on policy as they have ever been, making the result consequential for markets.”
Taxing matters. Taxes will be front and center. A Biden administration would target the 2017 corporate tax cuts for a partial rollback and float the possibility of higher rates on capital gains and dividends, as well as an expansion of payroll taxes for wealthy Americans. That would nick corporate profits and possibly dampen the animal spirits of investors, especially high net-worth taxpayers, but would be at least partially offset by aggressive economic stimulus, says Solita Marcelli, chief investment officer, Americas, at UBS Global Wealth Management. A Trump 2.0 administration would be incrementally positive for economic growth and the stock market, Marcelli says, counterbalanced by the risk of a re-escalation of trade wars.
Although the presidential candidates loom large during election season, Congress holds the key to big policy shifts. “A clean sweep, whether red or blue, makes a big difference,” says Marcelli. “In a divided government, enacting tax and spending legislation becomes more difficult. As a result, regulatory and trade policy become the main policy drivers.”
The chances of a blue sweep were rising midsummer, with Raymond James giving Democrats a 50% chance of taking back the Senate and a 95% chance of keeping the House. Republicans are defending 23 seats in the Senate; Democrats, 12. Democrats need to net four seats (or three seats plus the presidency) to flip the Senate. The toss-up Senate races as of July included Arizona, Colorado, Maine and North Carolina.
Expect some heated rhetoric and volatile markets in the run-up to Election Day. Read on to get a sense of how your finances will fare afterward.
The Market Reaction
As we head into election day, investors are understandably wondering—and even anxious— about how the U.S. presidential election will affect the financial markets. It’s important to remember that this year, especially, the election isn’t the only market driver, or even the main one. “Clearly there’s going to be a market impact from this election, but some of what impacts the market will be decided by a slew of other things beyond who’s at the top of the ticket,” says Ed Mills, a Washington policy analyst with investment firm Raymond James. “Where are we with the virus? Where are we on the economy?”
As the answers to those questions unfold, investors can at least look to history for some clues about the stock market. The four-year presidential market cycle is well known on Wall Street. During a presidential term, markets do best in the third and fourth years—election year and the year preceding it. Politicians tackle unpleasant tasks—a rate or tax hike, say—early on but prime the pump as the election approaches.
Donald Trump’s term has been anything but average. Trump years one and three (2017 and 2019) far outstripped the average price gain in the S&P 500 index for comparable years, going back to Franklin Roosevelt’s term beginning in 1941 through Barack Obama’s presidency, ending in 2016. Trump years two and four have underperformed the average. The question is whether the market’s recent upward trajectory will continue long enough to bring this election year up to average or beyond.
Beware of conventional wisdom that says Wall Street favors business-friendly Republicans at the helm. Since 1928, annualized total returns for the S&P 500 have averaged 13.3% under Democrats, compared with 7.7% under Republicans, according to InvesTech Research. For a hint about who will win the election, keep a close eye on market indexes. If they’re up in the three months preceding the election, the incumbent wins 87% of the time.
Whoever wins will fill top positions at the Securities and Exchange Commission and the Federal Reserve, important decisions for financial markets. As for the candidates’ policies, both party platforms remain sketchy on details in parts. A win by either side could mean different things for different portions of the market. Here are the issues that are likely to have the biggest impact.
Corporate taxes. In 2017, Trump (and a Republican-controlled Congress) cut corporate tax rates from 35% to 21%, spurring profits. If he wins a second term, corporate tax rates will stay the same and S&P 500 earnings could jump 30% in 2021 from 2020, say Credit Suisse analysts.
Biden would seek to raise the corporate tax rate to 28%, which could reduce earnings per share in the S&P 500 by 8% to 12% in 2021, according to estimates from Northern Trust. “Any tax increase is a negative for the markets, but it’s part of a complicated ecosystem,” says Northern Trust’s chief investment officer, Katie Nixon. Biden might spur growth in certain sectors by spending the extra tax dollars on climate, health care and infrastructure initiatives, among others, which could offset the one-time hit of a higher corporate tax rate. And a Democratic administration would be more robust in fiscal stimulus spending to support the economy, says Mills at Raymond James.
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