The ongoing Coronavirus pandemic has cast a shadow on the approaching Presidential election. An outcome which will have observable effect on the market and economy.
Polls and betting markets position former Vice President and Democratic candidate Joe Biden, as the favourite, over current President Donald Trump.
With the possibility of a Democratic win, acknowledging how Joe Biden plans to steer the economy is essential in order to appropriately hedge one’s portfolio for coming years – and to understand what marks Donald Trump has left on the economy, markets, and last but not least on Twitter – with statement’s like these:
If you want your 401k’s and Stocks, which are getting close to an all time high (NASDAQ is already there), to disintegrate and disappear, vote for the Radical Left Do Nothing Democrats and Corrupt Joe Biden. Massive Tax Hikes – They will make you very poor, FAST!
— Donald J. Trump (@realDonaldTrump) July 6, 2020
Donkeys vs. Elephants on Economic and Market Performance
Individuals often assume Republicans foster a more pro-business environment than their Democratic counterpart.
This notion originates from the Republican ideology of maintaining limited government regulation of the economy. Which provides corporations the ability to secure greater profits despite environmental concerns, labour union interests, healthcare benefits and retirement payouts. Also known as the Market Economy.
Democrats believe in a more regulated approach of the economy, believing that businesses are willing to act against social welfare in order to secure returns for their stakeholders. This regulation is often implemented through higher taxation, an approach described as “tax and spend”.
Though, contrary to popular belief, the US economy has fared much better under Democratic control than Republican.
A study issued by the US Congress Economic Committee determined, economic conditions like growth, job creation, and industrial production have improved greater under Democratic presidents, since World War II.
“The superiority of economic performance under Democrats rather than Republicans is nearly ubiquitous; it holds almost regardless of how you define success.” – Alan Binder & Mark Watson, Economists at Princeton University.
This is clearly demonstrated by the difference in performance of market indexes under Trump versus Obama. On average, market index returns were observed to be far superior under Obama’s term than Trump’s.
As of July 13th’s close, the S&P 500 has gained 38.5% since President Trump’s inauguration whereas returns under Obama during the same time frame were 67%. Similarly, as of July 13th the DJI has gained 31.3% since Trump’s inauguration while Obama produced returns of 62.6%.
S&P 500 Gains Under President Obama Vs. President Trump
DJI Gains Under President Obama vs President Trump
We must consider two major factors when comparing the returns under Obama versus Trump.
Firstly, Obama inherited the US economy as it bottomed out during the ’07-’08 financial crisis. The natural cycle of the economy provided Obama with a strong support for a bull run—it could only go up from here.
Secondly, Trump had to face the unprecedented COVID-19 pandemic, which led to a cascade of negative events in the economy and markets. Although Trump’s efforts to re-stimulate the economy have been controversial, the fact that the S&P 500 and DJI have almost recouped their losses entitles the President to some credit.
What a Joe Biden Victory Would Mean
Many analysts on Wall Street believe that a Biden election will be negative for equities.
JP Morgan strategists beg to differ – believing a Biden victory in November will have a neutral to slight positive effect on equities. A view that seems to be shared with the general market.
Once in power, Joe Biden is expected to:
Increase the US federal corporate income tax rate from 21% to 28% — a part of Biden’s strategy to tax the rich, in order to redistribute wealth and promote grater social welfare.
- This partially reverses the corporate tax cut outlined by Trump’s Tax Cuts and Jobs Act of 2017. Which saw the US federal corporate income tax rate decrease from 35% to 21%. The policy will result in lower profits for corporations and may be trouble for businesses barely swimming above water. A loss of $9 for S&P 500 earnings per share is expected from this tax hike.
- Considering this was Biden’s pre-COVID-19 policy, it may be subject to change in order to appropriately address the current business environment.
Increase the federal minimum wage.
- This policy will provide individuals with greater disposable income which will further drive demand in the economy and job creation. Offering itself as the appropriate counter-balance to the aforementioned tax hike.
- Possible drawbacks of the higher wage includes decreased corporate profits which may result in the termination of some workers in order to remain solvent. Companies may also choose to pass on the costs of increased wages to consumers.
Ease tariffs on China.
- By decreasing import taxes on Chinese products, a more efficient price equilibrium for goods will be available. This will also prevent corporations from passing on the costs of increased federal minimum wages (the scale effect) to the consumer. Though, this does put national businesses at jeopardy, as China is able to produce products at more cost-effective prices.
Increase infrastructure spending.
- In theory, this will provide a stimulus to the economy by driving aggregate demand. New infrastructure projects will provide the involuntarily unemployed with a public infrastructure job, where they will receive an income and depending on how quickly they spend it, may promote further economic growth.
Increased subsidies for alternative energies and green technologies.
- Biden has set a target for a 100% clean-energy standard by 2035 and plans to spend $2 trillion dollars over four years on clean energy.
Protect and improve the Affordable Care Act.
- This will grant a greater number of American’s the ability to afford medication and treatment. As well as, prevent market abuses from Pharmaceutical and Biotechnology companies by making it impossible to hike their prices above inflation.
This more diplomatic approach to foreign and domestic policy suggests that equities will have reduced volatility under Biden if elected. As such, investors will have less of a risk premium to enjoy, but will find comfort in the price stability of their portfolios.
Taking into consideration the aforementioned policies, possible firm’s could prove as effective hedge’s for a Biden victory:
Alternative Energy/Green Technologies:
Minimum wage hike:
Lacklustre market returns, controversial rhetoric on social media, and poor approval ratings suggests President Trump will be ending his term as President this November.
Understanding how his advisory, Joe Biden, will direct the economy is necessary to effectively hedge one’s portfolio.
Potential policies which may come into effect during Biden’s candidacy include:
- increased US federal corporate income tax,
- increased federal minimum wage,
- decreased tariffs upon China,
- increased infrastructure spending,
- increased subsidies for the alternative energies and green technologies space, and
- improvements upon the Affordable Care Act.
FYI — investors seem to be more concerned of the makeup of congress than who’s president.