Why stock investors should pray for a Biden presidency

25 Sep, 2020 - 00:09 0 Views
Why stock investors should pray for a Biden presidency Democratic presidential candidate former Vice President Joe Biden speaks after participating in a coronavirus vaccine briefing with public health experts, Wednesday, Sept. 16, 2020, in Wilmington, Del. (AP Photo/Patrick Semansky)

eBusiness Weekly

With the 2020 election less than two months away, Wall Street investors are weighing the pros and cons of a Trump versus Biden presidency. Polls show former Vice President Joe Biden holding a lead of 7,3 percent over President Trump, according to RealClearPolitics, though betting markets suggest a narrower spread.

Whatever the outcome, one thing is certain: The next president of the United States will be faced with a pandemic that has resulted in the death of more than 190 000 Americans and millions more unemployed as the economy struggles to recover from a record drop in GDP growth.

The stock market’s reaction to the presidential election will depend on which party ends up with control of the Senate and House of Representatives.

A Democratic sweep, for example, would almost certainly mean a rollback of Trump’s massive corporate tax cut (a negative for stocks), but additional economic stimulus (which investors apparently love despite surging deficit levels) and stability on the China trade front would be a big positive.

Here’s what happens to markets under various election scenarios (including delayed results), according to the experts.

Scenario 1: Status Quo

If Trump wins, Republicans hold the Senate and Democrats remain in control of the House, then markets will likely rally 3 percent to 5 percent on “no new news,” predicts wealth management firm Hightower Advisors.

The market initially jumped after Trump first won the 2016 election. He pushed through corporate tax cuts and relaxed business regulation. Don’t forget, the United States officially plunged into a recession in February 2020 and isn’t out of it just yet.

Scenario 2: Blue Wave

If Biden wins, Democrats take control of the Senate and retain the House then the market will likely see an initial selloff of between 2 percent to 5 percent, according to Hightower.

In this case, “we may actually see more of the Democratic policy changes enacted,” which include Biden’s promise to raise taxes, says Ross Hambrick, analyst for William Blair’s Dynamic Allocation Strategies Team.

In the past, a Democratic president supported by a Democratic majority in both houses of Congress usually resulted in an initial market selloff.

“Not surprisingly, the S&P 500 fell an average of 2,4 percent in November following the shock of a sweep, declining three out of five times,” says Stovall.

But stocks recovered by December, rising an average of 3,1 percent and gaining in price in all five past occurrences. The S&P then gained an average of 10,4 percent in the following calendar year, rising in price four out of five times, he adds.

If Democrats score a so-called triple play, “history hints but does not guarantee the initial shock will send stocks lower but then they will recover by December and in the following calendar year,” says Stovall. “Wall Street always tends to worry about a Democratic president yet the years in which we have Democratic majorities, the market’s frequency of advance was the highest.”

In the 22 past years when Democrats controlled the executive and legislative branches, the stock market rose an average of 9,8 percent, rallying 77 percent of the time after the election, according to CFRA Research.

If there is a Democratic sweep, sectors like renewable energy and industrials could benefit from a new focus on infrastructure in Washington, analysts say, while big tech and pharmaceutical companies would likely take a hit from increased government regulation.

Scenario 3: Biden wins, but Republicans hold the Senate

“This would be the friendliest to the markets as it would likely mean gridlock,” says Hightower, predicting that stocks could rally between 4 percent and 5 percent on the result.

If Biden wins but the Senate remains in Republican hands, that would “drastically reduce his administration’s ability to quickly implement his policies,” says Hambrick.

Biden would be more predictable on trade and international policy. This outcome would be “an almost status quo environment without the trade risk,” Hightower observes.

A Democratic president presiding over a split Congress would be the most favorable to markets, says Stovall.

Looking at historical data, this scenario actually leads to the highest stock market returns, with the S&P 500 rising by an average of 13,6 percent and rallying 75 percent of the time after the election.

“A split Congress historically has been better for stocks, which tend to like checks and balances to make sure one party doesn’t have too much sway,” agrees Detrick. A divided Congress results in an annual average return of 17,2, compared to 13,4 percent for a Republican Congress and 10,7 percent for a Democratic Congress, according to LPL’s research.

Scenario 4: Delayed election results

The worst outcome for the stock market is delayed or disputed election results. Several factors could lead to contested results, especially given the rise in mail-in ballots as the coronavirus keeps many people from voting in-person.

The last time presidential election results were held up was in 2000, when votes were so tight in Florida that a recount was initiated by the state.

The election wasn’t fully decided until a Supreme Court decision on December 12, five weeks after Americans cast their vote. Meanwhile, the S&P 500 plunged nearly 10 percent and the Nasdaq plummeted roughly 20 percent by the end of November.

Goldman has thus advised clients to hedge their market exposure going into December, in order to stem any losses incurred from uncertain election results. “Given the several-week delay in finalising the results of the 2000 presidential election . . . the elevated volumes of mail-in ballots used in recent primary elections, and potential for increased mail in ballots this November, we see heightened risk that election-related volatility could extend beyond Election Day,” Kostin said.

Stocks will fall if there isn’t a clear winner on election day, he says, and it will be a “bad outcome for America.” —  Forbes.

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