Possible Democratic “Blue Wave”: Stock Market Implications
As the 2020 Presidential election draws nearer, recent polling and betting sites suggest that former Vice President Joe Biden will maintain his lead over incumbent Donald Trump into election day. If the election on November 3rd results in a Biden presidency and Democratic control of the House and Senate, it is important to understand how this could impact the stock and bond markets and general tax and estate planning. First, we will examine the market impact that a Democratic “blue wave” could have on equities.
Tax Headwinds:
Biden has called for higher taxes on both corporations and personal income in the form of several proposals, outlined below:
- Increase corporate tax rates from 21% under the Tax Cuts and Jobs Act to 28% – still less than the prevailing 35% prior to 2017. Also, impose a 15% minimum tax on income that companies report on financial statements to shareholders.
- For people making more than $1 million per year, increase the long-term capital gain tax rate to 39.6%. Also, increase tax rates on people making more than $400,000 per year.
The net effect of these proposals would decrease corporate earnings in the U.S. by an estimated 9-10% (BCA Research), and fear of these proposals going into effect in 2021 could cause a short-term dip in the market before year-end as investors harvest some capital gains at the current, more favorable rates.
Increased Spending:
However, a Biden administration would also likely increase fiscal stimulus which could offset some of the negatives on corporate earnings from increased taxes.
Biden and many Democrats have called for a more significant stimulus package to help combat current unemployment and assist small businesses during the pandemic. If a Democratic “blue wave” occurs, this could result in a stimulus bill somewhere between $2.5 and $3.5 trillion. Moreover, Biden has also called for additional significant spending – roughly 3% of GDP – on education, infrastructure, healthcare and climate. This should boost consumer spending and capital spending. This should be beneficial for U.S. companies and for prices of U.S. stocks.
For bonds it is less clear cut. Bigger budget deficits could ultimately (post Federal Reserve stimulus) cause interest rates to rise, which would cause long-term bond prices to decline, though that could take a long time to play out.
A stronger economy should also help commercial real estate, though many office, hotel, entertainment and retail properties may not recover to pre-Covid 19 levels for many years.
Improved Trade Relations:
A Biden administration could also pivot significantly from the more combative and isolationist trade policies enacted the last few years. Biden has indicated a greater willingness to work with strategic allies rather than acting unilaterally, and he could begin to reduce some of the tariffs and non-trade sanctions imposed on China. In general, this would be a positive development for global stock markets.
Following the election, we will discuss tax and other issues and how to address them.