I’ve had several clients and friends ask my thoughts on how the election results may affect their security portfolios.  I’ll try to avoid my personal thoughts on the two major party candidates given the toxic nature of political discourse these days and focus as objectively as possible on how each candidate as president may affect both the overall stock market and certain industry sectors.   I will also avoid any specific investing recommendations as you may remember my erroneous picks 6 months from now and throw them back at me.

First and foremost, if your investment horizon is more than a few years, which should be the case for almost everyone including those of you in retirement, I don’t recommend wholesale changes to your portfolio.  Market timing fails more often than it works.  Also, the market supposedly handicaps potential outcomes, so unless you have tremendous conviction that is not shared by most market participants, likely results are substantially priced into the market already.

Now for the election: Most recent national polling indicates former Vice President Joe Biden with a reasonable lead, but the electoral college boils the election down to a few “swing” states.  National polling in the summer of 2016 showed Hillary Clinton with a lead and she did win the popular vote, but lost the electoral college.  You can get every vote in California, but if you lose Florida, Pennsylvania. and another swing state or two by a single vote, you are not going to be elected.

While the narrative often pushed is that Republican administrations are more business friendly given they generally propose lower taxes and reduced regulation as compared to Democratic administrations, stock markets have historically performed better when a Democrat is in the White House.  Some of this can be attributed to the tech bubble not completely bursting in January 2001 when George W. Bush took over for Clinton, and then Obama coming into office in January 2009 near the market trough of the Great Financial Crisis of 2008 and presiding over the rebound from the those depths.  Timing matters and stock market results are not always correlated to an administration’s business-friendly (or not) policies.

Since Trump was elected in 2016, the markets have had a nice run, notwithstanding the Coronavirus crash, although as of this writing the S&P 500 is now flirting with the pre-pandemic high.  Prior to the 2016 election, the consensus was that the market would sell-off if Trump were elected.  That prediction didn’t even last one day as the markets rose the day after Trump’s victory.  During his first year in office with Republicans controlling both the House and Senate, he was able to get the first major tax reform bill passed in over 20 years, which lowered corporate tax rates from 35% to 21%.  If you do the math, raising net income from 65 cents per each pre-tax dollar of earnings to 79 cents is an increase in net profit of 21.5%.  That’ll move markets and essentially transferred wealth from the government, as tax receipts were reduced, to corporations and therefore shareholders.  Keep in mind that most large companies are global so their overall tax rates don’t track exactly to the U.S. corporate tax rates.

Biden has a tax plan that generally raises taxes.  He proposes raising corporate tax rates from 21% to 28% which as detailed in the preceding paragraph would lower corporate net income and likely stock prices.  While he is avoiding the “Wealth Tax” pushed by the more progressive Democrats, he wants to raise the top marginal tax bracket back to 39.6% from 37%.  He also wants to tax capital gains at higher ordinary tax rates for those reporting more than a million dollars on their tax return.  Another meaningful change would be eliminating the “step-up” of basis for inherited property, meaning heirs (of the wealthy) would have a lower basis and therefore higher gains when disposing of inherited property.  All these measures are meant to redistribute wealth from the highest earners to low and middle-income Americans.  In isolation, these tax measures if implemented should be a drag on the stock market.  Keep in mind that Biden’s chances of passing any tax reform will be dependent upon which party is in control of the House and Senate.

President Trump has tried to increase employment by providing support for certain struggling industries such as coal and other fossil fuels while making efforts to remove some of the tax credits and other incentives for developing clean energy sources.  Over the last decade, wind and solar energy advancements have made them more price competitive to fossil fuels even before considering the environmental and health costs associated with fossil fuels.  In my humble opinion, we should be looking forward and advancing new technologies rather than propping up dying industries.  Without going into too much detail, this can be done while directing jobs and benefits to those most affected by the decline in those dying industries.  Clearly Tesla is eating GM and Ford’s lunch and created tremendous wealth for their shareholders and added thousands of jobs while the legacy auto makers have shed jobs and watched their stocks decline significantly in value.

Another tug-of-war is the effect of the ballooning federal deficit and easy and cheap money available through the Treasury Department and Federal Reserve.  The U.S. hasn’t had a surplus since Bill Clinton was in the White House over 20 years ago.  Increased military spending for Iraq and Afghanistan and bailing out the economy after the Great Financial Crisis and now the Coronavirus pandemic has increased our federal debt to a number well in excess of GDP for the first time since the rebuilding of the economy after World War II.   This debt is much more serviceable today given near zero interest rates, but rating agencies have been downgrading U.S. sovereign debt which together with reduced trade could negatively affect the role of the dollar as the world’s default currency.  This would likely reduce the attractiveness of our debt and increase the cost of servicing it.

Perhaps the most underappreciated aspect of the current administration’s effect on business is how difficult it is for companies, both small and large, to invest for the future when navigating through the midnight tweetstorms about trade and regulation by President Trump.  This messaging creates uncertainty and has the effect of limiting investment.  While returns on investment often take years to realize and the timing of stock market gains related to those investments are difficult to predict, they will almost certainly add value over time.

What does this all mean?  Who knows!  As I mentioned in the second paragraph, if you have a reasonable investment horizon, stay the course and only tweak at the margins.  Uncertainty as to the outcome of the election keeps investors on the sideline.  Once the election is over, that uncertainty will be resolved.  It is easy to over-analyze the potential changes of a President Biden or keeping the current course with President Trump, but the one constant is that the United States is an innovation and entrepreneurial juggernaut and the political pendulum will swing back and forth.

I hope you and your loved ones are safe and healthy. If you have any questions about this commentary or anything else related to your financial life, my line is always open.

Best regards,

Steve