To date, 2020 has been anything but ordinary. The world would never be the same after COVID-19, with the stock market already having hit record highs and several lows this year. We are all wondering what to expect over the next few weeks. The United States will hold the biggest political event amidst the pandemic, the U.S. presidential election Election on November 3rd, 2020.
History suggests that the U.S. stock market would experience some short-term fluctuations and volatility, which correlated with the presidential election.
During an election cycle, you might encounter some impact on your portfolio and traders are questioning how the stock market will be affected. The effect a president can have on the economy and market depends on their ability to pass legislation.
Here is a range of views on the possible U.S. power shift.
- Raise the corporate tax rate from 21% to 28%.
- Impose 15% minimum tax on book income so that no corporation gets away with paying no taxes.
- Raise top individual income rate back to 39.6%
Require corporations and wealthier Americans to pay their fair share of tax, and it will raise the much-needed revenue to pay down the tower of debt accumulated during the pandemic.
The tax increase will reduce corporate profit, which might give a negative impact on the surging stock market. Goldman Sachs warns that Biden’s tax plan, combined with an expected drag on GDP, would lower next year’s S&P 500 per-share earnings by $20 to $150.
On the other hand, UBS Asset Management’s strategic asset allocation team said, “a Biden-led increase in taxes and public spending could give markets outside the U.S. a boost. This outcome is likely to be associated with a weaker dollar and better relative performance for equities outside the U.S.”
- Provide tax relief to 82% of the middle-class families – this could increase spending on each household, which will then boost the economy.
- Reduce small business taxes by 20% and provide $415 billion in tax relief for small business owners- this could encourage foreign companies to do more business stateside, an additional benefit to the U.S. economy.
- Reduce the corporate tax rate from 35% the highest among 37 developed nations in the OECD to 21%. This will make US companies be more competitive on the world stage and hopefully use their tax windfall in business spending on things like raise wages, purchase new equipment, or invest in research and development.
According to S&P Dow Jones Indices, Buybacks at S&P 500 companies soared by 55% to a record $806.4 billion in 2018, the first year the tax law took effect, and repurchased another $728.7 billion of stock in 2019. This shows, though the tax overhaul was sold as a job-creator, there was no lasting boom in business.
Here are some examples of the impact of Trump’s previous corporate tax:
- Harley-Davidson announced it would repurchase almost $700 million worth of its own stock, slash 350 manufacturing jobs, and shift some of its production overseas.
- Wells Fargo saved nearly $6.5 billion from the tax giveaway in 2018 and 2019, then authorized $40 billion worth of stock buybacks, raised interest rates on borrowers, and announced that it would lay off up to 26,000 workers.
Trade tensions could persist between the U.S. and China. As Trump is not changing his promise to put “America first”, the question is if Biden wins, could he ultimately bring meaningful change to the U.S.-China policy?
- If Biden wins, the U.S could achieve a more positive outcome for Asia equities, with a more predictable and less hostile foreign policy toward China.
- Biden has a much less aggressive tone and would likely seek to change China’s trade practices through multinational organizations like the World Trade Organization and international diplomacy.
- Biden also stated the best way to confront China on intellectual property and technology transfers is by forming a coalition with allies and partners, not through unilateral tariffs.
The U.S.-China trade war has dominated headlines during President Trump’s first term. He promised to put “America first” in all dealings with countries and penalize those the U.S. has a high trade deficit with.
So far, Trump Administration has pulled out of several trade deals and levied hundreds of billions of dollars in tariffs on Chinese companies. There is no sign he plans on changing his strategy.
“Trump re-election would leave Asia largely where it is now, but possibly with some relief on China-U.S. relations. After the vote, it’s also possible Trump would feel less need to act tough on China,” said Dan Fineman, co-head of Asia-Pacific equity strategy at Credit Suisse Group AG.
Experts warn Trump needs to think twice about going into a trade war with China, while the overburdened U.S. healthcare system depends on China for medical supplies. It accounts for 48% of all personal protective equipment imports in the U.S.
The effects felt in the healthcare sector have often shown increased volatility leading up to a presidential election. A tougher stance on drug prices may put a constraint on the pharmaceutical and biotechnology sector.
- Expand ObamaCare so that 97% of Americans are insured and cost $750 billion over 10 years.
- Allow Medicare to negotiate lower prices with drug manufacturers.
- Establish an independent review board that will recommend a reasonable price for drugs with no competition.
- Penalize drug price increases over the inflation rate.
- Restore federal funding for Planned Parenthood.
- Trump administration has proposed deep health care spending cuts over the next decade, mainly to Medicaid ($900 billion) and Medicare ($450 billion).
- Trump has repeatedly promised to bring down drug prices, but we haven’t seen significant results so far.
- Stopped reimbursing insurance companies for costs they incurred helping low-income customers.
- Medicare for All would cost more than $30 trillion over 10 years.
Tech policy may not be at the forefront of voters’ minds. But whoever wins the presidential election will have a lot of influence on everything from setting infrastructure policy on broadband deployment to any regulation imposed on social media giants.
- Support for small and medium-sized tech firms.
Regulatory action on the tech sector could intensify in his second term. The Trump Administration Justice Department is preparing to launch an antitrust action against several large tech companies.
Presidential elections usually cause an increase in market volatility, and this 2020 election will undoubtedly have an enormous impact on the market direction, especially when the outcome is uncertain. A volatile market is generally associated with investment risk; however, with risk also comes the opportunity of rewards.
Short-term traders would do well to take advantage of the volatile market; while those looking for long-term gains should look to base their trades on the candidates’ policies.