Investors seem to have convinced themselves that the outcome of the November election will be favorable for them. A bit more caution seems to be in order.
Steady gains in the polls have made Joe Biden the odds-on favorite to win the presidency, and lately it looks as if the Democrats could capture the Senate as well. Even though Democratic control of the White House might herald higher taxes on corporate profits and tighter regulations, stocks have been doing well and valuations are near their steepest levels since the dot-com debacle. The thinking seems to be that, regardless of who wins, a big stimulus package will be on its way by January. That, in combination with an eventual vaccine and a Federal Reserve that has pledged to keep monetary policy easy, could make the economy really hum.
economists estimate that the substantial stimulus that would come with a Democratic sweep, along with longer-term spending increases on areas such as infrastructure and health care, would provide the economy with a boost that would at least match any eventual drags on growth from higher taxes on corporations and higher-income earners.
Even in the event that Goldman’s analysis turns out to be on the mark, though, it is important for investors to remember that what is good for the economy isn’t always what is good for the stock market. Mr. Biden’s plan calls for the corporate tax rate, which was lowered to 21% from 35% under the 2017 tax law, to increase to 28%. It also would increase the additional U.S. taxes some companies have to pay on foreign income under the Global Intangible Low-Taxed Income system that the 2017 tax law implemented as a way to discourage companies from concentrating profits in low-tax jurisdictions. Finally, it would introduce a minimum tax on corporations with book profits of $100 million or more.
Combined, those measures would lower earnings at companies in the S&P 500 by more than 10%, according to an analysis conducted by Zion Research Group. One danger is that investors, in their excitement over the possibility of another big round of stimulus, aren’t paying close enough attention to the costs that could eat away at the profit surge they are counting on. Regulatory costs and a Biden labor agenda could weigh as well.
More From Heard on the Street
Airlines Are Charting Different Courses. Cash Could Decide the Winner.
October 23, 2020
China Wants to Be the World’s EV Factory. It May Succeed.
October 23, 2020
Capital One Opens Wallet on Credit Performance
October 23, 2020
Intel’s Cloud Thickens
October 23, 2020
Another possibility is that Mr. Biden wins the presidency but Republicans hold onto the Senate. A group of forecasters with a demonstrated knack for forecasting, known as superforecasters, polled by forecasting research consultancy the Good Judgment project, give Mr. Biden an 86% chance of winning, but a lower 77% probability of the Senate coming under Democratic control. Statistical models based on polling data are in a similar ballpark. Under that split-win scenario, the increase in corporate taxes that could come about under a Democratic sweep wouldn’t happen, but the regulatory environment under the sway of the executive branch would shift.
More important, the chances of additional support to help the economy weather its way through the Covid crisis would be diminished. Senate Republicans have balked at House Democrats’ plans for a big round of stimulus, even as President Trump urged them to “go big,” and hopes for any sort deal happening before Election Day are dwindling. Given the high level of partisanship, the Senate might be even less likely to support a big package with Mr. Biden as president.
The third possibility is that Mr. Trump again defies the apparent odds and wins the presidency. The superforecasters might only give a 13% chance of that happening, but something that could occur more than one out of every 10 throws doesn’t count as a rarity. And with over a week before Election Day, plenty could still change. If Mr. Trump’s odds are seen as increasing, stocks that have been rising as Mr. Biden’s prospects have improved, such as shares of solar-panel manufacturer First Solar, could be in for a fall. And shares of companies believed to have better prospects under a second Trump administration, such as Exxon Mobil, could rise.
The stock market doesn’t decide who wins the election, but history shows that a weak performance in the run-up to the vote favors the challenger—and vice versa. WSJ’s Paul Vigna explains how market swings can affect President Trump and Joe Biden.
In the ultimate negative scenario for stocks, at least in the short-run, the results of the election might not be known for weeks — particularly with the surge in mail-in votes, many of which won’t be counted until after Election Day. That would set the stage for an uncertain and litigious period, with neither candidate willing to concede, tempers running high and an uncomfortably high chance of violent unrest. Investors appear to have become less worried about this as expectations of a decisive Biden victory on election night have risen. The cost of insuring against market volatility in November and December is lower than it was at the beginning of this month.
Maybe things will turn out just right for the stock market following the election, with the economy soon putting the coronavirus crisis behind it and profits coming back strong. But it isn’t hard to imagine the future might be a little less rosy than investors hope.
SHARE YOUR THOUGHTS
How do you think the election’s outcome will affect the stock market? Join the conversation below.
Write to Justin Lahart at firstname.lastname@example.org
Corrections & Amplifications
Joe Biden’s tax plan would lower earnings for companies in the S&P 500 by more than 10%, according to an analysis conducted by Zion Research Group. An earlier version of this article incorrectly said it would lower them by 9.8%. (Corrected on Oct. 23)
A Global Asset Management Seoul Korea Magazine