The most likely outcome from the U.S. Presidential Election is a Biden presidency and Democratic sweep in both Congress and the Senate. The argument for this scenario is the current polling statistics, notwithstanding the 2016 experience, and current market action which has seen democratic-friendly sectors moving up strongly. We’ll outline some key Biden policy initiatives and the market impact.
We will also briefly discuss the less likely scenario of a second term for Trump.
Biden’s negative impact from proposed higher taxes would be offset by targeted spending proposals which would translate into more jobs and higher economic growth. These measures are largely oriented towards working class and middle class families.
Biden proposes to increase the corporate tax rate to 28% as well as increase the tax on corporate income earned abroad. For individuals, the top tax rate would return to 39.6% and capital gains would be taxed at the individual tax rate. He would also increase the child tax credit and expand the dependent care tax credit.
Market Impact: The S&P 500 Index earnings per share would be negatively impacted by 6% to 8%. Disposable income for top earners would decline. This could have negative ramifications for higher end consumer goods as well as higher end housing, but these categories are also dependent on economic activity.
Biden would facilitate labour unionization and policies that generally help the average worker with, for example, a ban on state level right to work laws. In addition, minimum wage would increase to $15/hour. A Buy American procurement investment of $400 billion would be introduced.
Market Impact: This will generally increase costs for businesses.
In certain cases, those costs will be passed on to end buyers or users, but it will be on a case by case basis. The Buy American investment would provide assistance to U.S.-based companies.
TARIFFS AND TRADE:
Biden would use a multilateral approach to deal with China rather than tariffs and has criticized the Phase 1 trade deal. Biden historically has been pro-trade and would be open to joining the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. He is in favour of more bilateral trade agreements.
Market Impact: Tariffs have presented an increasing degree of unpredictability and uncertainty for business under Trump, so Biden would bring some welcome stability. The elimination of some tariffs would reduce costs to many businesses. Europe, and Germany in particular, would benefit from a Biden presidency because the threat of European tariffs would be off the table.
Arguably, it is a similar situation for Canada, where arbitrary tariffs have hurt numerous businesses. While Biden would present a greater degree of stability in U.S. trade policy, the focus on U.S. workers, combined with incentives to bring back manufacturing jobs to the U.S., would ensure that tensions wouldn’t disappear, including the tensions with China.
ENERGY and INFRASTRUCTURE:
The goal is to be carbon neutral by 2050, and this calls for $1.3 trillion in spending closely tied to climate change, with investments in electronic vehicles, rail projects, green energy and energy efficiency. The U.S. would rejoin the Paris Climate Accord. Biden favours pricing carbon emissions and he supports nuclear energy, but more limited support for traditional oil and gas, with lower tax credits and no new leases on federal lands. He supports fracking. In addition, Biden would commit $100 billion to modernize schools and provide funds for the depleting Highway Trust Fund.
Market Impact: This is arguably the most significant portion of the Biden platform, as the proposed investments are massive and would be supplemented by private enterprise investments. It is also a continuation of initiatives in China and Europe who are aggressively investing to transform their economies toward renewables. The U.S. is the last link in this global initiative. This has positive implications for industrial sectors like engineering and construction as well as heavy industry. Finally, it is positive for metals like copper, nickel and zinc which are instrumental in electric vehicle batteries.
Biden has not specified a position of breaking up large tech companies, yet he has called for a revocation of section 230 of the Communication Decency Act which currently provides social media companies protection from disseminating misinformation.
Market Impact: Breaking large tech companies will not go away and would likely be a feature of a Biden presidency. In some cases, companies like Google or Amazon could head some of this off by spinning out YouTube or AWS respectively, and that is unlikely to hurt their stock price. Section 230 requires reform to better manage disinformation on the internet. Some companies like Twitter and Facebook are starting to take measures in this regard, but it’s being seen as too little too late.
The Biden scenario is market positive, as it provides for limited tax hikes while spending to transform the economy, much like what is happening in the rest of the world.
A less likely but still possible scenario is a Trump win, which would see a continued Republican Senate but a split Congress with Democrats maintaining the House.
The one proposal that Trump has tried but failed to realize is a major Infrastructure bill on account of the reluctance of Republican senators. Trump recently tweeted he would favour a $2 trillion bill which a second Trump presidency would certainly push, but it’s not clear if Republican Senators would change their position given Trump will have limited political capital. This means Trump would focus much more on foreign policy where he is less constrained by Congress. Other than maintaining policies implemented in the first term, there is not much else to discuss on new initiatives.
Market Implication: Infrastructure spending would certainly be up for discussion with pressure to pass something even as it is more likely to be oriented towards traditional infrastructure like roads and bridges. Trump’s focus on foreign policy could be destabilizing if it means more tariffs, combined with heightened tensions with both traditional allies in Europe as well as China. A continued dismantling of multilateral institutions would see China filling the void and continuing to gain influence and power from the West.
In a Democratic sweep, expect markets to rally and the dollar to fall.
Source: Signature Global Asset Management, October, 2020