August 23, 2020 Presidential Election Market Thoughts  by Matt Somberg & Nick Hogrefe

August 23, 2020 Presidential Election Market Thoughts by Matt Somberg & Nick Hogrefe

August 24, 2020

Good Sunday Evening.  I hope you and your family are all well.

We have recently received client questions about the upcoming election.  With Covid-19 conditions in Connecticut having significantly improved, clients are spending more time focused on November. While still 70 days or so away, Senior Research Analyst Nicholas Hogrefe and I thought it would be a good idea to send along some thoughts regarding the upcoming election for clients to review.

It can be challenging to receive news these days without a bias involved.  We often need to remind ourselves which television channel we are watching or which newspaper we are reading to think about any bias that may be influencing the information we are receiving.  We hope to be as objective as possible in sharing information with you. Whenever our firm or our Advisors have dialogue about politics it is important to preface our remarks by stating our views are focused entirely on the economic and market impacts of policies.  We stay away from conversations about social policy, environmental policy etc., as anything outside of economics and finance is beyond our expertise.

It is important to understand how each candidate – and their proposed agenda – will impact your investment portfolio and financial plan. While there are many differences in each party’s social and economic views, they do share a similar goal – which is help the United States recover from the economic damage caused by the Covid-19 pandemic.

First, some facts:  History shows that the stock market does not care if the President is a Democrat or a Republican.  Going back to 1860, a portfolio that consisted of 60% stocks and 40% bonds has averaged over 8% per year, no matter which party controlled the Presidency. The annual compound return for a 60/40 portfolio during years in which a Democrat controlled the White House was 8.4%, while a Republican held White House returned 8.2%. In addition, the same 60/40 portfolio performed better during election years (8.9%) compared to non-election years (8.0%).1 Those returns are not guaranteed to repeat themselves, but history has proven that those who remain invested – even during uncertain times – typically benefit in the long-run.  The facts show that betting on the stock market to go up or down based on a Democrat or Republican winning the presidency is a bet not worth taking.

Let us begin with a review of both candidate’s economic proposals and then we will highlight three possible outcomes for election results. We will begin with the incumbent, President Trump:

President Trump:

  • Donald Trump’s economic policies are focused on lower taxes and less regulation. In 2017, he signed the Tax Cuts and Jobs Act which lowered tax rates for corporations from 35% to 21% and reduced the tax rate for individuals and families.
  • He has suggested investing $1 trillion towards infrastructure with an emphasis on roads, bridges, and water systems. Trump’s plan would likely be funded with fuel taxes.
  • Trump has given little information with regards to how he will approach taxes and regulation should he win, but it is safe to assume that not much will change. He has stated that he will likely look to extend the Tax Cuts and Jobs Act, which expires in 2025. We will likely learn more about his proposed policies during the upcoming Republican Convention.

Democrat Nominee Joe Biden:

  • Joe Biden has stated he wants to raise taxes, particularly for corporations and the wealthy. His plan suggests a $4 trillion dollar tax hike which would primarily impact businesses and people earning more than $400,000 annually. He wants to raise the highest income-tax rate for corporations and individuals to 28% and 39.6%, respectively.
  • An increase in taxes would likely lead to higher government spending within the economy. Biden suggests that higher spending in areas such as healthcare, infrastructure, and clean energy would increase employment and strengthen the economy.
  • Biden did not spend a lot of time during the Democratic Convention being specific on his economic policies.  There is still more to learn in the next two months.  Additionally, should he win, investors will be very interested in who he appoints as Secretary of the Treasury.

Either candidate’s ability to pass legislation is dependent upon the make-up of Congress.

Trump Wins; Republicans Maintain Control of Senate

A Trump victory and Republican control of the Senate likely means lower taxes and less regulation within the economy. Investors are familiar with a Trump Presidency which would provide a certain level of certainty to the stock market. The flip-side to a Trump Presidency is a less predictable trade relationship with China and Europe. Theoretically, lower taxes combined with an accommodative Federal Reserve (low interest rates) would lead to higher stocks prices. While that is certainly viable in this scenario, investor sentiment could be diminished as uncertainty related to trade could detract from improving economic fundamentals.

Biden Wins; Democrats win Senate

A so – called “Blue Wave” would certainly mean higher taxes and regulation on the economy. In the short-term, this most likely translates to a slight sell-off in the stock market as investors are forced to reprice investments based on new variables introduced to the market. Put another way, if corporations have to pay more in tax, they are less profitable and their stock price declines. This scenario could also become a buying opportunity as markets have historically overestimated the magnitude of such policies proposed during the election season. For example, Biden is proposing a corporate tax rate in the amount of 28%. Should Biden win and Democrats take control of the Senate, markets would quickly reprice stocks downward based on that assumption. Should taxes increase by a smaller amount (say 24%) then stock prices would likely go up as companies’ after-tax revenue would be higher than originally thought.

In addition, the impact of a Biden victory and a Democrat-controlled Senate could be lessened if spending on projects – such as infrastructure – is increased. Lastly, once the election passes investors will redirect their attention back to Covid-19 and its potential impact on the economy going forward. The economy may not be in a position to tolerate Biden’s immediate tax increase during a recession with 30 Million Americans unemployed, so tax reform could get pushed to 2022, leaving companies and individuals in a better position to recover.

Biden Wins; Republicans Maintain Control of Senate

A Biden victory coupled with a Republican majority in the Senate is likely to provide stability to global markets. While ‘political gridlock’ is not ideal for passing meaningful legislation, it does tend to lead to more stability within financial markets. A more predictable trade policy along with a possible continuation of Trump’s tax policies would provide certainty and would outweigh higher regulatory costs. Investors tend to prefer certainty, and this scenario serves as a well-balanced mix of regulation and lower taxes that could benefit many industries.

In Conclusion

As is the case with all elections, there will be industries that will benefit and industries that will not. That is the nature of a free market society. The best approach to long-term investment success is to maintain a balanced, diversified approach by owning asset classes that are designed to benefit in any economic scenario and not try to time short term events. From there, it is important to have a plan to take advantage of market dislocations that occur based new variables being introduced into the market.

A properly developed financial plan that incorporates time horizon, risk tolerance, and spending need should always be the foundation for how one’s portfolio is invested and is most important during periods of uncertainly such as Presidential elections. Like any other short-term concern or crisis, this too shall pass. Volatility is inevitable, but if investors use it to their advantage by rebalancing periodically to maintain their target asset allocation, it can increase the probability of achieving long-term financial success.

Regards,

Matt                                                               Nick

Matthew A. Somberg, AIF®                        Nicholas Hogrefe, CFA, CFP®
Accredited Investment Fiduciary®            Senior Research Analyst
Co- Founder and Principal

 

This information is provided for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is no guarantee of future results.

1 Source:  Vanguard.