Here’s What a Biden Win Could Mean for the Stock Market
September 3, 2020
By Acuity Trading
As the US Presidential elections draw closer, investors should brace themselves for some stock market turbulence. Thanks to the pandemic, investors have grown accustomed to market volatility, and trading volumes have risen amid price swings.
So far Donald Trump has managed to grab the spotlight, and not just with tweets. Many of his policies were pro-corporates, especially the $2 trillion tax breaks, which triggered the stock market rally soon after he was elected President. However, the spiking covid-19 cases and battered economy could cause serious damage to Trump’s popularity. The declining viewership of the three-day Republican National Convention may be an indication of this. The event drew around 17 million viewers across six networks, representing a 23% decline from the viewership in 2016. What rubs salt to injury is that the Democratic National Convention attracted almost 20 million.
Trump thanked CNN for covering the Republican Convention, after years of touting it as promoting “fake news,” but what even he cannot deny is the growing popularity of Democratic Presidential candidate Joe Biden, who currently leads in national polls and surveys of key states.
So, what does Joe Biden as President mean for the markets? Biden recently announced his “Buy American” plan, which focuses on an economic recovery fuelled by strengthening manufacturing and tech firms. The plan proses $400 billion to be spent on government purchases of US made goods and $300 billion to be channeled into R&D in American technology firms.
Markets have been on tenterhooks with the stalemate between the Congress and the White House on the new covid-19 relief package, as can be seen in the Acuity Historical Sentiment Chart.
It all sounds exciting on paper, and the stock market may react positively to this. But, let’s take a moment to wonder how Biden proposes to pay for the $700+ billion campaign. These funds may come from tax collections. Biden does intend to repeal the Republican-backed tax breaks for US companies and take corporate taxes to as high as 28%.
Biden’s tax plan poses a real threat to tech giants like Amazon, Apple, Facebook and Google. Let’s not forget that the country’s tech behemoths have carried the weight of the economy and the stock market amid the covid-19 crisis. Thanks to these companies, the Nasdaq has hit 35 record highs this year. This is supported by the Acuity Trading dashboard.
Apart from tech giants, the telecom and healthcare sectors could be the hardest hit by higher taxes. If these companies waver due to the tax hike, it could be brutal for the stock market.
The bad news for companies (and their stocks) doesn’t end there. While businesses pay higher taxes, they will also bear the burden of an increase in minimum wages. Although historically a change in tax rates or wages have not materially impacted the stock market, Biden couldn’t have chosen a worse time for this twofold setback. America’s GDP has just contracted by more than 30% and businesses are in a vulnerable, uncertain state.
Asia, on the other hand, seems eager to see a Biden victory, given the current US-China tensions.
The onslaught from the Trump administration has hit investor sentiment in the Asian markets.
A Biden win could dampen risks in Asia’s largest economy and boost Australian markets as well. The risks will not be completely mitigated, and Asia’s technology and trade sectors may continue to face political headwinds. What gives some hope is that the issues may be handled in a less kneejerk and confrontational manner. Yes, we mean Biden may tackle issues more diplomatically.
Analyst Nader Naeimi of Sydney’s AMP Capital Investors recently said in an interview, “The wild swings in political decision-making, in particular with China, led to a rising equity risk premium for Asian assets.” We believe that under Biden political decision-making may become more predictable, bringing increased stability to Asian equities and currencies.
What is certain right now is that the US Presidential elections will be messy, and the results will likely be contested by the losing party. Panic is inevitable and momentum investors need to rethink their strategy. Markets will remain volatile in the run-up to the new US President entering the White House. What one can hope for, however, is that a Biden win will put an end to market volatility induced by tweets!