Elections and the markets

RYAN   By Guest Blogger Ryan Lewenza


In the very immediate future, the US presidential election is about to kick-in to high gear and will be a focal point for investors and the markets. Currently, investor focus is on COVID and new infection rates, the reopening of the US/global economy, the unrest in the US, and all the government stimulus announcements. However, soon investors and the markets will be turning their attention to the US election and what the outcome could portend for the economy and equity markets. In this week’s post I examine the historical impact of presidents on the US equity markets and review the key policies that could impact the US economy, equity markets and Canada.

Currently, Trump is on his back heels with Biden being the clear front runner based on numerous polls and betting websites. Below are the current odds of winning the Electoral College from The Economist. Based on their models they have Biden winning 341 electoral votes to Trump’s 197 votes, and have Biden at an 85% probability of winning the Electoral College and becoming the 46th US president.

Now a lot can change from now till then, and as we saw in the 2017 election, polls don’t always get it right. But given these current readings and Trump’s recent setbacks (e.g., handling of the pandemic, the ongoing recession, and his response to the recent protests), I believe Trump faces an uphill battle to securing a second term. This is not a political statement, rather my current assessment of the US presidential race.

What are the implications of a Biden win (if I’m right) or a Trump win (if I’m wrong)?

Chance of Winning the Electoral College

Source: The Economist

There is a commonly held view that the US equity markets perform better under republican control given the party’s focus on lower taxes, deregulations, and overall being more business friendly. Well the facts don’t support this thesis, as based on my analysis, the equity markets have performed better under democratic presidents.

Below is a great chart that illustrates this. I calculated the average performance of the S&P 500 over the four-year president term since 1945 under both democratic and republican presidents. The results are surprising. On average, the S&P 500 has gained 56% (price return only) under a democratic president versus 27% under a republican president.

Now it’s important to stress that luck and circumstances also plays a role in these returns. For example, President Obama took over after a terrible bear market under Bush II, and saw great returns over his 8-year term in office. But even with this, given the numbers we’re dealing with (8 democratic and 9 republican presidents) this is a decent sample size, and I believe has some investment merit.

Key point here is, don’t jump to conclusions and think that if Biden pulls out the win and becomes the next US President that the stock market and economy are going to go into the crapper. In fact, this analysis shows quite the opposite.

S&P 500 Performance under Different US Presidents

Source: Bloomberg, Turner Investments. Based on S&P 500 data from 1945 to present

The most significant impact to the equity markets, should Biden win in November could be with corporate tax rates and their impact on corporate earnings. Biden proposes raising the US corporate tax rate from 21% to 28%, reversing some of the huge Trump tax cuts that went into effect in 2018 (Trump and the republicans cut the corporate tax rate from 35% to 21%).

If Biden wins and is able to pass this legislation then this will surely impact corporate profitability, which is a key long-term driver of equity returns.

Expectations for S&P 500 earnings next year are $162/share, which equates to a 29 Y/Y growth rate, based on 2020 estimates of $125/share. If Biden hikes tax rates then this could shave off 5% or $9-10/share in earnings next year. Basically, this could cut potential earnings growth from 29% Y/Y to 22% next year, which doesn’t help stock prices.

The upside of these tax cuts (assuming he doesn’t just redirect all the higher tax revenue to increased spending) would help to cut their massive deficit, which is a big concern of mine.

All else equal, a Biden corporate tax hike would be negative for US stocks, if enacted.

Next up is China, which is critically important as it appears that a cold war is brewing between these two competing, hegemonic nations. Trump has taken a very hardline approach (some of it I agree with) with China through aggressive trade policies and tariff increases. I do see some long-term benefits of these aggressive moves (e.g., onshoring manufacturing, having more control over supply lines) but Trump’s strongman approach brings some negative reactions as well as there is greater uncertainty, and global tensions, which is never good for the economy and stock markets. We saw numerous market declines over Trump’s first term, which were a byproduct of his aggressive moves with China.

While I don’t see Biden as a pushover, I think he would take a less hostile and combative approach than Trump with China, which I see as a positive for the US/global economy and equity markets.

Lastly, a Biden win would be bad for our already battered energy sector, as he’s been very direct about his opposition to TC Energy’s (TransCanada) Keystone pipeline, a position shared by his old boss President Obama. Biden recently stated “I’ve been against Keystone from the beginning. It is tarsands that we don’t need — that in fact is very, very high pollutant,” in an interview with CNBC. It wouldn’t be a death blow to our energy sector, especially with TransMountain gearing up, but it definitely wouldn’t help it either.

I see pros and cons for both Biden and Trump on the economy and markets (my focus on this blog is finance and investments and I try to leave my political opinions/biases aside), and I see the US election playing a bigger role in the media and markets in the coming months. A lot’s at stake in this upcoming election so it’s going to be interesting. Buckle up!

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.



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