Market and Economic

U.S. presidential election outlook

As the 2020 election season heats up, it is important to understand the investment implications of a potential change in government versus the status quo.
August 2020

As the 2020 election season heats up and President Trump’s odds of winning continue to run cold, we believe it is important to understand the investment implications of a potential change in government versus the status quo. Below, we have outlined the policy implications of the three most likely election outcomes: a Democratic sweep, a Biden presidency with a Republican Senate and a Trump presidency with a Republican Senate. This analysis assumes that Democrats hold the House, which we believe is highly likely.

Democratic sweep

Betting markets and polling currently project a Democratic sweep as the most likely election outcome. In this scenario, Democrats will control both Congress and the White House. Generally speaking, this is the least market-friendly outcome of the three scenarios. The legislative and executive branches of government would be a potent combination in enacting a Democratic wish list of proposals.

Odds of a Biden victory

US presidential election outlook - Odds of a Biden victory since January 2020

Source: PredictIt, Bloomberg LP.

One of the first priorities will be taxes, with proposed legislation including an increase in the corporate tax rate, an increase in personal income tax for high earners, elimination of carried interest and taxing capital gains as ordinary income for those earning more than $1 million. Tax changes are likely to affect corporate earnings: Strategas Research Partners estimates an 11% decline in earnings per share under this scenario. The Democratic agenda may also include legislation addressing a public healthcare option, prescription drug prices and climate change. Significant regulatory changes would likely accompany these legislative changes. In fact, we could easily see regulatory changes surpassing those of the Obama administration. The easiest and most likely target will be energy. Biden will likely have the EPA reinstate all of the environmental regulations rolled back by President Trump. He is also likely to rejoin the Paris climate agreement and outlaw fracking on public lands. Additionally, we expect new actions from the Department of Labor as Democrats push for more pro-union regulations.

Though we believe that Democratic control of the government will be a net negative for markets, there are some offsets. Biden is likely to continue the U.S.’s tough stance on China, but the threat of tariffs on other trade blocs and countries would diminish. In addition, a Biden presidency would likely emphasize infrastructure spending. If the unemployment rate remains elevated, Democratic control would be a positive as they would be less resistant to additional stimulus. We are already seeing the hesitancy of some Republicans to provide additional fiscal support to a recovering economy, despite the resurgence of COVID-19.

Investment implications of a Democratic sweep would mostly be seen in the equity markets. We would expect a minor selloff as the market begins pricing in the hit to corporate earnings from the proposed tax policies. However, we think this would be primarily felt before the election as the market anticipates the outcome. The implications of a Biden presidency would be magnified in sector divergences. Technology, financials, pharmaceuticals and traditional fossil fuel energy companies may underperform as added regulation eats away at earnings. Relative outperformers will likely include managed-care providers, renewable-energy companies and infrastructure-related companies.

Biden and a Republican Senate

A divided government with Biden as president and a Republican Senate is the second most likely outcome. This could be considered a bullish outcome for markets. Though the regulatory burden would increase in areas such as technology, pharmaceuticals, healthcare and financials, the 2018 tax cuts would be protected as Democrats would lack the numbers in the Senate to repeal them. In addition, the market could view a Biden presidency as lower-risk in other ways, especially as it relates to trade tensions and market-moving tweets. Areas of common ground between Democrats and Republicans might even be found in this scenario, specifically around prescription drug prices, infrastructure and technology regulation. However, given recent history, it is hard to expect common ground to be the priority — obstruction and the status quo may still be the name of the game. This outcome would likely be best for tax-sensitive companies, the financial sector and multinational corporations with a large foreign presence, as they would avoid having their business model disrupted.

Trump and a Republican Senate (status quo)

Though the least likely outcome in light of the president’s current polling numbers, a Trump win cannot be discounted. 

The polls had it wrong in 2016, though Biden’s lead is currently outside of the polling margin of error and his approval rating is much higher than Hillary Clinton’s ever was. Trump’s re-election would be the most bullish outcome for U.S. markets. The Trump tax cuts for individuals and corporations would be preserved. Additionally, the administration would continue to push for simplifying individual taxes down to two rates, though this would be unlikely to pass through a Democratic House. Given the nature of divided government, much of the president’s agenda would be implemented through executive order. Where he could do the most is on trade. Given the deteriorating relations with China over COVID-19, trade tensions will remain elevated in the short-term. If he wins a second term, Trump would likely feel emboldened on trade with the European Union as well, as the U.S. and U.K. work through their bilateral trade agreement. In addition to trade, the president will probably continue to block China from sensitive sectors of the U.S. economy. The administration is also likely to continue to limit China’s access to U.S. technology, and to continue pressuring companies to move sensitive supply chains to the U.S.

President Trump job approval average

US presidential election outlook - President Trump job approval average since January 2020

Source: RealClear Politics, Bloomberg LP.

Areas of possible compromise between the Trump administration and House Democrats would be infrastructure spending and pharmaceutical prices. Though the president has long pushed for over $1 trillion of infrastructure spending, he has been blocked by Senate Republicans. Given that more stimulus is likely needed to heal the economy, the beginning of a second term may provide his best chance. On pharmaceutical prices, the president is likely to have more willing partners within his own party.

A Trump second term would be positive for equities as both corporate tax increases and more onerous regulation will be off the table. Winners will likely be traditional energy companies, financials, defense contractors — as military spending won’t be cut — and tax-sensitive corporations. A second term would be negative for international markets as the trade threat would continue and perhaps expand.

Conclusion

As we approach November, we expect both national and swing-state polls to tighten. Given the unpredictability of COVID-19 and the associated economic costs, much can happen to move both polls and markets over the next three months. While the election poses risks, we believe the uncertainty is outweighed by a positive environment for both fiscal and monetary policy.

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Disclosures

This is not intended to serve as a complete analysis of every material fact regarding any company, industry or security. The opinions expressed here reflect our judgment at this date and are subject to change. Information has been obtained from sources we consider to be reliable, but we cannot guarantee the accuracy. This presentation may contain forward-looking statements. “Forward-looking statements,” can be identified by the use of forward-looking terminology such as “may”, “should”, “expect”, “anticipate”, “outlook”, “project”, “estimate”, “intend”, “continue” or “believe” or the negatives thereof, or variations thereon, or other comparable terminology. Investors are cautioned not to place undue reliance on such statements, as actual results could differ materially due to various risks and uncertainties. This publication is prepared for general information only. This material does not constitute investment advice and is not intended as an endorsement of any specific investment. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investment involves risk. Market conditions and trends will fluctuate. The value of an investment as well as income associated with investments may rise or fall. Accordingly, investors may receive back less than originally invested.

Foreign investing involves special risks due to factors such as increased volatility, currency fluctuation and political uncertainties. Investing in emerging markets can be riskier than investing in well-established foreign markets.

Past performance is not necessarily a guide to future performance. Asset allocation does not ensure a profit or guarantee against loss.

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