Will The 2020 Election Affect The Stock Market? – Our October 2020 Market Outlook

Will The 2020 Election Affect The Stock Market Title Block

Key Takeaways

– Many people are asking “Will The 2020 Election Affect The Stock Market?”

– The S&P pulled back in September with the most volatility seen since June. 

– With less than a month to election day, markets may focus on impact of a contested election.

Election To Take Center Stage At Least In The Headlines 

Will The 2020 Election Affect The Stock Market?

While we maintain our view that elections have very little long-term effects on the market, we would not be surprised by some volatility through at least the first half of November. This month we thought we would look at the pros and cons that each candidate/party brings. We would stress this is through a market perspective, and we do not endorse any candidate or party, nor do we wish to persuade anyone in their voting preferences. Politics can be very emotional, and we are firm believers that investing based on emotion is not a recipe for long term success.  

At the time of writing, former Vice President Joe Biden maintains a commanding lead in the polls. Nate Silver’s Five-Thirty-Eight, which does excellent statistical analysis on politics and sports, puts the odds of a Biden win at 81% as of October 5, 2020. His lead has been fairly stable with a slight post-debate bump. It is important to note that markets are forward looking and therefore, have most likely, at least partially priced in a Biden administration. This means, despite some market negative policy proposals, a Biden win would likely not garner a big reaction in stock prices. The biggest market negative from a Biden administration is his stated goal, which was reiterated in the debate, to raise the corporate tax rate.

Higher taxes will obviously weigh on corporate earnings and the timing is especially poor with valuations already stretched and a high degree of uncertainty of the recovery. Biden would like to raise the corporate tax rate from 21% to 28%. Additionally, impose a 15% minimum tax on a company’s book income, with tax credits for foreign paid taxes. As well as, double the minimum tax on profits earned by foreign subsidiaries from 10.5% to 21%. The overall tax burden facing corporations would still be lower than it was prior to the Trump tax cuts, but certainly would be substantially higher than it is today. Biden is also in favor of increasing the top marginal tax rate to 39.6%, phasing out the small business income deduction above $400,000 and taxing capital gains as ordinary income for investors making over $1,000,000.

While increases on the personal side of the tax code would likely be less impactful to the broader economy, these policies, at least at the margin, are a headwind to investment and would weigh on the long-term growth potential of the economy. From a policy standpoint, Biden is the less market favorable candidate, but that is not to say there are not market positives from a Biden administration. The most market favorable aspect of a Biden administration is the increased likelihood of a much larger stimulus package. In our opinion, the current impasse is a very under appreciated risk to the market. The other major market positive to a Biden administration is normalized trade policy.

In our opinion, the brewing cold-war with China is likely to continue regardless of the outcome of the election. However, outside of China, a Biden administration is likely to be more pro-free trade, which is good for the economy and stock market. It would be wrong to consider Biden a free-trade champion, but Trump’s mercantilist view of free trade sets a quite low bar to beat. Given that Biden’s market negative policies are mostly in the form of taxes, he will need Democratic control of Congress to have them gain any traction. Control of the House is very likely to remain in the hands of the Democrats, but the Senate race is much closer. This does expose a sort of market sweet spot where trade policy, which the President has a lot of control over, moves in a market favorable direction, but any tax reform would be “dead-on-arrival” in a Republican controlled Senate. In the past markets have liked gridlock.  

An analysis of a Trump victory is easier as it would more-or-less be the status quo. Deregulation is almost always at least a short-term positive for the market, and would continue in a second term. A continuation of current tax policy would also be well received. Trade will always be a wild card for Trump, but given that a trade deal has been renegotiated with the U.S.’s North American trading partners, the uncertainty surrounding trade policy would be less than it was in the President’s first term. Overall, Trump is the more market favorable candidate from two standpoints; his policies are more market friendly and there is more uncertainty when shifting from the status quo, than when staying the course. Markets like certainty. 

Perhaps the biggest overhanging risk is a contested election. Both sides have already built a case to undermine election results, but Trump has certainly been more forceful in his efforts. Given the current climate of social unrest and partisan division, a contested election would likely be much more disruptive than it was in 2000. In that regard, a decisive victory by either side might be cheered by the markets. A decisive Biden victory in the popular vote actually seems likely. However, the popular vote does not decide the election. Races are far more fluid. Swing states and victory margins are likely to be low for either side, making the race to 270 electoral college votes perhaps closer than national polls would indicate. 

Close margins in swing states would very likely lead to a contested election, in which case the Supreme Court or even the House of Representatives would decide the election. Democratic control of the house is very likely to be maintained in this election, and therefore the next House that would select the President. However, it is not a simple vote; each state gets a vote based on the majority of their representatives. There are more Democratic Representatives than Republican, but currently Republicans would win in the state delegation count, assuming party line voting. This could shift in the election, but would require a very strong showing from the Democrats. Long story short, the Constitution has built in ways of determining contested elections and given the makeup of the courts and House, the remedies of a contested election favor Republicans. Markets would likely prefer a more normal outcome in which the election is determined sooner than the contingencies would allow for, and results are not contested. 2020 Election Affect The Stock Market

What should I do?  

Elections are emotional; investing should not be. Despite the rhetoric, the election is unlikely to have a huge impact on the economy or stock market in the long run. Illustrating this point, Republican candidates are usually considered more market positive, but markets have actually done better under Democratic presidents in the modern era. It is best to stick to your plan and focus on the long term, regardless of the outcome.  

To learn more about the writer of this article, Cormac Murphy, CFA, visit: https://adamswealthadvisors.com/team/cormac-murphy/

Or connect with him on LinkedIn: https://www.linkedin.com/in/cormac-murphy-cfa-33897914/.


Disclosure:

Adams Wealth Management is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and, unless otherwise stated, are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.